Q2 2024 Ingevity Corporation Earnings Call
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Speaker Change: The Integrity Second Quarter 2024 Earnings Call and Webcast will be starting in a few moments. Please stand by whilst we resolve today's connection issues with the speakers before beginning today's conference call.
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Brieke: Good morning all and thank you all for attending the Ingevity Second Quarter 2024 Earnings Call and Webcast. My name is Brieke and I will be your moderator today.
Brika: My name is Brika, and I will be your moderator. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, John Nypaver, from Ingevity, to begin, so you may proceed, John. Thank you, Brika.
Brieke: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, John Nypaver, from Ingevity to begin. So, you may proceed, John.
John Nypaver: Good morning, and welcome to Ingevity's second 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 Nypaver: Thank you, Brika. Good morning and welcome to Ingevity's second 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 Nypaver: Also, throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for, comparable GAAP. 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. Our agenda is on slide three.
Speaker Change: Also, throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for, comparable GAAP measures.
Brieke: Definitions of these non-gap financial measures and reconciliations to comparable gap measures are included in our earnings release and are also in our most recent form 10-K.
Brieke: 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 Nypaver: 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 Hume, President of Advanced Polymer Technology, are available for questions and comments. John will start us off with some highlights for the quarter and an update on our repositioning efforts in performance chemicals. Mary will follow with a review of our consolidated financial performance and the business segment results for the second quarter. John will then provide closing comments and discuss 2024 guidance. With that, over to you, John. Thanks, John. And hello, everyone.
Speaker Change: Our agenda is on slide three. Our speakers today are John Fortson, our president and CEO, and Mary Dean Hall, our CFO.
Speaker Change: Our business leads, Ed Woodcock, President of Performance Materials, Rich White, President of Performance Chemicals, and Steve Hume, President of Advanced Polymer Technology, are available for questions and comments.
Speaker Change: Mary will follow with a review of our consolidated financial performance and the business segment results for the second quarter. John will then provide closing comments and discuss 2024 guidance. With that, over to you, John.
John Fortson: There's lots to talk about on this call. As you have no doubt seen, we announced further repositioning of our performance chemicals segment, a process that started last fall with the closure of our Jeridra, Louisiana facility. Mary and I will speak in detail about what we have done, why, and where we are going.
John Fortson: These recent actions, the termination of the CTO supply contract, the Goodwill Impairment, and the relocation of our oleo refining to Charleston, are important milestones to move the PC segment forward and get these issues behind us to create a stronger, more stable PC segment for 2025 and beyond. First, though, let us address the quarter. Turning to slide four, overall, it was a mixed quarter. I'll start by highlighting performance material, which for the first time ever delivered a fourth straight quarter of 50% plus EBITDA margin.
John Fortson: Most simply, the value we get in the market for our product. Lower production costs and increased hybrid adoption are more than offsetting both soft auto production and full BEV vehicle market penetration. Macro trends continue to benefit the segment as hybrids and ICE vehicles are making up a larger mix of autos being produced.
John: Most simply, the value we get in the market for our products, lower production costs and increased hybrid adoption are more than offsetting both soft auto production and full BEV vehicle market penetration.
John Fortson: And while the cost of energy improved versus last year, what is helping the segment maintain these margins is our plants are using less energy due to operational efficiencies the team has implemented. Both the commercial team and the operations team are ensuring this segment continues to fire on all cylinders. Advanced polymer technologies saw a third straight quarter of volume growth, and year-over-year volumes were up as well. We see encouraging signs in end markets such as electronics and automobiles, which is driving higher demand for Kappa encodings and high-performance adhesives.
John Fortson: Your volumes have begun to bounce back. However, China and, to some extent, the U.S. continue to be impacted by slower industrial demand. The team is focusing on markets where CAPA's value proposition helps maximize profitability in a dynamic environment, and they continue to deliver 20% margins. In performance chemicals, McQuarrie's results were impacted by our reduced exposure to certain end markets as part of our repositioning efforts. Several other factors were at work as well. As you may have heard from other companies, there was a lot of rain across the country in May. You can't pave or do road markings when it rains.
Mary: Europe volumes have begun to bounce back. However, China and to some extent the U.S. continues to be impacted by slower industrial demand.
Mary: The team is focusing on markets where CAPA's value proposition helps maximize profitability in a dynamic environment, and they continue to deliver 20% margins.
John Fortson: So the quarter got off to a slow start. We estimate we missed about two weeks' worth of sales due to this rain. In fact, July was wet as well due to the hurricane reaching landfall in Texas.
Speaker Change: We estimate we missed about two weeks worth of sales due to this rain.
John Fortson: If the weather improves and holds up the rest of the summer and well into the fall, we can get those sales back. But road construction projects are weather-dependent, so we'll see. We are confident, however, that the pavers, if they can, will work as hard as possible to make up for this lost time. Second, a weaker-than-anticipated industrial market recovery has impacted the industrial specialties product line. In the quarter, revenue from our non-CTO, oleo-based products was up versus last year, but the pace of this growth is slower than we'd like. Finally, the price we paid for CTO in the quarter remained elevated, and this negatively impacted the segment's profitability. Now, let's turn to slide five.
Speaker Change: Second, a weaker than anticipated industrial market recovery has impacted the industrial specialties' product lines.
John Fortson: We will discuss CTO in more detail. A few weeks ago, we announced the termination of our final long-term CTO supply agreement. This was a critical step to move as quickly as possible to a market cost for CTO, meaning the price we have been paying was well in excess of what we and our competitors could source in the open market. This creates a clear path for the PC business to improve its profitability and put an end to the negative cash drain these purchases were creating.
Speaker Change: This was a critical step to move as quickly as possible to a market cost for CTO, as the price we had been paying was well in excess of what we and our competitors could source in the open market.
John Fortson: We said on our last quarterly call that we expected the CTO price we pay under our long-term supply contract to moderate in the second half. But during the quarter, we were informed that the contracted price for the second half would be much higher than expected. As we have discussed before, when we closed our Derrida, Louisiana facility, our remaining long-term supply contract required us to continue buying CTO earmarked for that facility for a two-year wind-down period, leaving us with excess CTO.
Speaker Change: We said on our last quarterly call that we expected the CTO price we pay under our long-term supply contract to moderate in the second half of the year.
Speaker Change: But during the quarter, we were informed that the contracted price into the second half would be much higher than expected.
John Fortson: We were reselling that excess CTO at forecasted losses of $50 to $80 million in 2024. We expected that our contract prices would come down in the second half of 2024 and throughout 2025, and those resale losses would be narrow. However, it became apparent that this would not be the case in the foreseeable future. Therefore, we negotiated a buyout of the contract for $100 million, payable in two $50 million installments.
Speaker Change: As we have discussed before, when we closed our Derrida, Louisiana facility, our remaining long-term supply contract required us to continue buying CTO earmarked for that facility for a two-year wind-down period, leaving us with excess CTO.
John Fortson: Effective July 1st, we are no longer obligated to take CTO from any long-term contract. We have enough CTO on hand and are available via short-term deals. We will cover our needs through the first quarter of 2025, and we believe there are enough available options in the market to meet our needs next year and beyond. We will still feel the impact of this higher price CTO on this PC segment's P&L through the remainder of this year until the end of the first quarter of 2025 as we work through the higher cost inventory we have on hand.
Speaker Change: We will still feel the impact of this higher price CTO on this PC segments P&L through the remainder of this year and until the end of the first quarter of 2025 as we work through the higher cost inventory we have on hand.
John Fortson: After that point, we will be purchasing and using CTOs that we acquire in the open market. While painful, this was an important step for the business to move forward and return to profitability and cash generation. Mary will provide more detail on the impacts on our financial statements in a few minutes. Now, please turn to slide six, in order to reduce our cost structure. We are transferring the refining of oleobase raw materials to our North Charleston facility.
Speaker Change: However, after that point, we will be purchasing and using CTO that we acquire in the open market.
Speaker Change: While painful, this was an important step for the business to move forward and return to profitability and cash generation.
Speaker Change: Mary will provide more detail on the impacts to our financial statements in a few minutes.
Mary: Now please turn to slide six.
John Fortson: This will result in the closure of our CrossFit Arkansas site. A key tenet of our growth strategy and performance chemicals is to diversify our raw material streams and grow our oleobase penetration into our legacy markets, while also developing new market opportunities for these oleo-based products. This is not a chance.
Mary: A key tenet of our growth strategy and performance chemicals is to diversify our raw material streams and grow our oleobase penetration into our legacy markets, while also developing new market opportunities for these oleobase products.
John Fortson: Operationally, we've proven the fatty acids we make from soy and canola work, and in fact, we've made great progress in using them as substitutes in existing products like paving and lubricant. North Charleston is where we originally piloted the refining of old, and other changes we have made at the site have freed up capacity. So we can use existing infrastructure to quickly begin refining soy, canola, and other oil-based materials, with the added benefit of having post refinery derivatization capabilities on site in North Charleston.
Speaker Change: This has not changed. Operationally, we've proven the fatty acids we make from soy and canola work, and in fact, we've made great progress in using them as substitutes in existing products like paving and lubricants.
Speaker Change: North Charleston is where we originally piloted the refining of oleos.
Speaker Change: and other changes we have made at the site have freed up capacity.
Speaker Change: So, we can use existing infrastructure to quickly begin refining soy, canola, and other oil-based materials, with the added benefit of having post-refinery derivatization capabilities on-site in North Charleston.
John Fortson: The North Charleston site has both a refinery that runs CTO but also a smaller secondary refinery, which we call the B&G. This refinery has approximately 25 to 30 percent of the capacity of CrossFit. And with modest investment, that capacity can be increased to 50% across its output, and there is the ability to expand further as the need requires. This capacity is enough to meet the perceivable demand for oleo growth. By operating both refineries on one site, we get the benefit of higher fixed cost absorption.
Speaker Change: This refinery has approximately 25-30% of the capacity across it. With modest investment, that capacity can be increased to 50% across its output and there is the ability to expand further as the need requires.
Speaker Change: This capacity is enough to meet the foreseeable demand for oleo growth. By operating both refineries on one site,
John Fortson: And we also save on the transport of oleo products from CrossFit to Charleston, where we derivatize them into finished goods. Crossets' underutilization was causing a drag on the segment's earnings. Concurrent with the Crossit closure, we are reducing headcount to adjust for the smaller physical footprint, with overall annual savings expected to be $30 to $35 million beginning in 2025, when you account for both the closure in Crossit and reductions at corporate funds. On slide seven.
Speaker Change: Concurrent with the cross at closure, we are reducing headcount to adjust for the smaller physical footprint.
John Fortson: You'll see a recap of our repositioning strategy, which is to reduce our exposure to low-margin cyclical end markets, to diversify our raw material streams, and optimize our physical footprint, all of which will create a more profitable and stable business cycle. By exiting the CTO contract, we have put this cash drain behind us, and by the end of the first quarter of next year, we will be running the business with lower cost, market-priced CTOs, which will enhance both our profitability and competitive position in the market.
Speaker Change: On slide 7, you'll see a recap of our repositioning strategy, which is to reduce our exposure to low-margin cyclical end markets.
Speaker Change: diversify our raw material streams, and optimize our physical footprint, all of which will create a more profitable and stable business segment.
John Fortson: We said previously that 2024 was going to be a transition year for performance chemicals as we execute on this reposition, while we always continue to assess how best to optimize our business. We believe most of the heavy lifting is now behind us to return this segment to profitability. Now, I'll turn it over to Mary to run through the financials for the quarter. Thanks, John, and good morning, all.
Speaker Change: We said previously that 2024 was going to be a transition year for performance chemicals as we execute on this repositioning.
Speaker Change: While we always continue to assess how best to optimize our businesses,
Speaker Change: We believe most of the heavy lifting is now behind us to return this segment to profitability.
Mary Dean Hall: Please turn to slide eight. Second quarter sales of $390.6 million were down 19% due primarily to our repositioning actions in performance chemicals, which included reducing our exposure to certain low margins and markets in the industrial specialties product line and continued weakness in industrial demand, which impacted both industrial specialties and APT. In addition, we saw lower sales in road technologies in the quarter due to adverse weather conditions in North America. However, EBITDA margins improved 80 basis points to 26% as a strong quarter from performance materials more than offset lower margins in performance chemicals.
Speaker Change: Now, I'll turn it over to Mary to run through the financials for the quarter.
Mary: Thanks, John. And good morning, all. Please turn to slide 8.
Mary: Second quarter sales of $390.6 million.
Mary: were down 19%, due primarily to our repositioning actions and performance chemicals.
Mary: which included reducing our exposure to certain low margins and markets in the industrial specialties product line and continued weakness in industrial demand which impacted both industrial specialties and APT.
Mary: In addition, we saw lower sales in road technologies in the quarter due to adverse weather conditions in North America.
Mary: EBITDA margins improved 80 basis points to 26% as a strong quarter from performance materials more than offset lower margins in performance chemicals.
Mary Dean Hall: During the quarter, we had $13 million of restructuring charges and $24 million of CTO resale losses related to the performance chemicals repositioning. We also booked a non-cash goodwill impairment charge of $349 million for the performance chemical segment, which was triggered when we received new information from our long-term supplier regarding CTO pricing for the second half of 2024, which was much higher than expected. When performing the Goodwill Impair
Mary: During the quarter, we had $13 million of restructuring charges and $24 million of CTO resale losses related to the performance chemicals repositioning.
Mary: We also booked a non-cash, goodwill impairment charge of $349 million for the performance chemical segment.
Mary: which was triggered when we received new information from our long-term supplier regarding CTO pricing for the second half of 2024, which was much higher than expected.
Mary Dean Hall: We updated the growth assumptions for all product lines and performance chemicals as required. The combination of current depressed financial performance and the continued weakness in industrial demand, with limited indications of near-term recovery, caused us to revise our growth expectations for industrial specialties and markets, including oleo markets and road markings, which are being negatively impacted by fierce competition in the paint space, which represents approximately half of our road markings product sales. Our analysis indicated that the book value of the segments significantly exceeded their values, resulting in a total impairment of performance chemicals recorded goodwill.
Mary: When performing the Goodwill impairment testing, we updated the growth assumptions for all product lines and performance chemicals as required.
Mary: the combination of current depressed financial performance
Mary: and the continued weakness in industrial demand with limited indications of near-term recovery.
Mary: caused us to revise our growth expectations for industrial specialties and markets.
Mary: including oleo markets and road markings, which is being negatively impacted by fierce competition in the paint space, which represents approximately half of our road markings product sales.
Mary: Our analysis indicated that the book value of the segments significantly exceeded their values, resulting in a total impairment of performance chemicals recorded goodwill.
Mary Dean Hall: The goodwill charge of $349 million, the CTO losses of $24 million, and the restructuring charges of $13 million are a combined total of $386 million of non-operating charges, which led to a gap net loss of $283.7 million. We've excluded the impact of these charges in our non-GAAP disclosure and our discussion for the remainder of this presentation.
Mary: The goodwill charge of $349 million.
Mary: the CTO losses of $24 million and the restructuring charges of $13 million are a combined total of $386 million of non-operating charges.
Mary: which led to a gap net loss of $283.7 million.
Mary: We've excluded the impact of these charges in our non-GAAP disclosure and our discussion for the remainder of this presentation.
Mary Dean Hall: A reconciliation of our non-GAAP measures to GAAP is included in the appendix to this deck and also in our earnings release in Form 10-Q, which will be filed this evening. Our adjusted gross profit of $140.5 million declined 17% due primarily to lower sales and performance chemicals, while gross profit margin was higher by 80 basis points due to a combination of increased sales and performance materials, reduced exposure to lower margin and markets and performance chemicals, and realized savings of $17 million related to the performance chemicals repositioning and other corporate actions taken last year.
Mary: A reconciliation of our non-GAAP measures to GAAP is in the appendix to this deck and also in our earnings release in Form 10-Q, which will be filed this evening.
Mary: Our adjusted gross profit of $140.5 million declined 17%.
Mary: do primarily the lower sales and performance chemicals.
Mary: while gross profit margin was higher by 80 basis points.
Mary: due to a combination of increased sales and performance materials.
Mary: reduced exposure to lower-margin end markets and performance chemicals, and realized savings of $17 million related to the performance chemicals repositioning and other corporate actions taken last year.
Mary Dean Hall: Adjusted STNA improved 16% year-over-year, which included realized savings of about $5 million related to last year's action. The total realized savings of $22 million in the quarter put us on track to achieve our target of $65 to $75 million in annual savings from the combined restructuring actions taken last year. Our Diluted Adjusted EPS and Adjusted EBITDA dollars declined on the lower sales, but we delivered a strong Adjusted EBITDA margin of 26%, reflecting the underlying strength of the company's core portfolio as we repositioned performance chemicals. We estimate our 2024 tax rate will be between 23 and 25 percent.
Mary: Adjusted STNA improved 16% year-over-year, which included realized savings of about $5 million related to last year's action.
Mary: The total realized savings of $22 million in the quarter put us on track to achieve our target of $65 to $75 million in annual savings from the combined restructuring actions taken last year.
Mary: are diluted adjusted EPS and adjusted EBITDA dollars declined on the lower sales.
Mary: But we delivered a strong adjusted EBITDA margin of 26%, reflecting the underlying strength of the company's core portfolio as we repositioned performance chemicals.
Mary: We estimate our 2024 tax rate will be between 23 and 25 percent.
Mary Dean Hall: Turning to slide nine, I'll focus on leverage and pre-cash. We ended the quarter with reported leverage of about four times, and we expect Q2 to be the peak leverage this year, as we noted in our last earnings call. Also, I want to point out that our leverage calculation for the prior two quarters changed as a result of guidance from the SEC to revise future filings to no longer exclude certain inventory charges from adjusted EBITDA.
Speaker Change: Turning to slide 9, I'll focus on leverage and pre-cash flow.
Mary: We ended the quarter with reported leverage of about four times and expect Q2 to be the peak leverage this year as we noted in our last earnings call.
Mary Dean Hall: We had excluded inventory write-downs of 19.7 million in Q4 of 2023 and 2.5 million in Q1 of 2024. These have now been included, therefore reducing adjusted EBITDA in those respective quarters. The appendix to the slide deck and the press release have the details of our leverage calculation. We expect leverage to decline through the second half of this year and to end the year at about 3.5 times. Our bank calculated leverage was 3.3 times at the end of Q2, and we are comfortably in compliance with all of our bank covenants. Free cash flow for the quarter was $12 million, which includes the negative cash impact of $26 million of CTO resale losses and $13 million of restructuring charges.
Mary: therefore reducing adjusted EBITDA in those respective quarters. The appendix to the slide deck and the press release has the details of our leverage calculation.
Mary Dean Hall: Without these, free cash flow would have been $50 million, and On Pace to exceed our original guidance for full year free cash flow of greater than $75 million. Looking at the second half of the year, we have revised our guidance to include the $100 million CTO contract termination fee and approximately $10 million for primarily severance-related cash costs associated with the closure of the CrossFit plant, resulting in an updated free cash flow guidance from greater than $75 million to slightly positive for the full year.
Mary: Without these, free cash flow would have been $50 million and on pace to exceed our original guidance for full year free cash flow of greater than $75 million.
Mary: Looking at the second half of the year, we have revised our guidance
Mary: resulting in updated pre-cash flow guidance.
Mary Dean Hall: We have a table on our guidance slide, slide 13, and it highlights the $155 million of cash drag from CTO resales and the termination fee that won't recur. So let's turn to slide 10, and you'll find results for performance materials. Sales were up 9% to $157.2 million, and EBITDA was up 28% to $82.2 million, with an EBITDA margin of 52.3%.
Mary: So let's turn to slide 10, and you'll find results for performance materials.
Mary: Hales were up 9% to $157.2 million, and EBITDA was up 28% to $82.2 million, with an EBITDA margin of 52.3%.
Mary Dean Hall: I always caution folks not to forecast a repeat in quarterly margins when it comes to this business, but after four quarters of 50% plus margins, even I am ready to say that we expect full-year margins at 4 p.m. to be in the 50% area. We had our normal scheduled downtime at the plants during the quarter and expect to have similar downtime the rest of the year. Input costs such as energy and certain raw materials were lower year over year, but a major driver of the improved EBITDA is the operational efficiencies John mentioned earlier.
Mary: Input costs, such as energy and certain raw materials, were lower year over year, but a major driver of the improved EBITDA is the operational efficiencies John mentioned earlier.
Mary Dean Hall: Energy prices will fluctuate, but the team has made improvements at our plants such that we are consistently using less energy than before, and we're seeing the results benefiting the bottom line. We believe this is a structural and sustainable cost improvement in the business. Over the long term, we continue to expect EBITDA margins in the mid to high 40s. Turning to slide 11, revenue in APT was $47.9 million, down 10% as lower pricing in all regions offset higher volumes. Volumes were up nearly 5% year over year, and this was also the third straight quarter of volume growth. Europe has seen a very strong rebound from last year's lows, while Asia, particularly China, continues to be weak.
John: Energy prices will fluctuate, but the team has made improvements at our plants such that we are consistently using less energy than before, and we're seeing the results benefiting the bottom line.
John: We believe this is a structural and sustainable cost improvement in the business.
Mary: Over the long term, we continue to expect EBITDA margins in the mid to high 40s.
Mary: Turning to slide 11, revenue in APT was $47.9 million, down 10% as lower pricing in all regions offset higher volumes.
Mary Dean Hall: But we're seeing encouraging signs as the team focuses on higher margin opportunities in end markets, such as electronics and auto, that appear to be in the midst of a rebound. These efforts, along with lower energy costs and continued discipline in managing SG&A, contributed to the segment's 20% EBITDA margin. Now, please turn to slide 12 for performance chemicals results. Sales of $185.5 million were down 35%, primarily due to the repositioning actions affecting the industrial specialties product line, which had sales dropped 60% to 56.4 million.
Mary: But we're seeing encouraging signs as the team focuses on higher margin opportunities in end markets such as electronics and auto that appear to be in the midst of a rebound.
Mary: These efforts, along with lower energy costs and continued discipline in managing SG&A, contributed to the segment's 20% EBITDA margin.
Mary: Now, please turn to slide 12 for Performance Chemicals results.
Mary Dean Hall: On our last call, we indicated that we expected sales for industrial specialties to be about $65 million per quarter for the rest of the year. But given the muted industrial recovery expectations for the second half of this year, it's more likely that sales will be in the $50 to $55 million range per quarter for the remainder of the year. Road technology sales were down $11.8 million from a record quarter last year attributed to weather-related delays and road construction projects.
Mary: On our last call, we indicated that we expected sales for industrial specialties to be about $65 million per quarter for the rest of the year.
Mary: Road technology sales were down $11.8 million from a record quarter last year, attributed to weather-related delays and road construction projects.
Mary Dean Hall: EBITDA for the segment was $9.3 million, down 79% due to significantly higher CTO costs and lower low capacity utilization rates at our CrossFit and North Charleston sites. As John mentioned, this segment will be working through the existing high-cost CTO inventory for the remainder of the year and into Q1 of 2025, which will negatively impact margins for these next three quarters. Given the many changes impacting this segment, we are sharing our expectation that Segment EBITDA will be break-even for the full year 2024, with a return to profitability in 2025.
Mary: Given the many changes impacting this segment, we are sharing our expectation that Segment EBITDA will be break-even for full year 2024.
Mary Dean Hall: Our transformation of the performance chemicals segment into a more specialty-focused, less capital-intensive business is well underway, and we expect to see the benefits beginning in the second quarter of 2025, resulting in more profitable and stable financial performance. Now I'll turn the call back to John for an update on guidance and closing comments. Thanks, Mary. Please turn to slide 13.
Mary: with a return to profitability in 2025. Our transformation of the performance chemicals segment into a more specialty-focused, less capital-intensive business.
John Fortson: This has been a busy quarter in Japan. We discussed additional steps taken in our repositioning effort. We discussed terminating our CTO contract. We discussed the slower sale of our Oleo-based and InSpec products in a weaker industrial market and weather delays impacting road safety. Based on what we see at this point, industrial markets remain soft going into the second half of the year. Furthermore, more bad weather impacted road construction in July.
Mary: We discussed additional steps taken in our repositioning efforts.
John Fortson: Therefore, we are revising our full-year sales guidance to be between $1.4 billion and $1.5 billion and adjusted EBITDA guidance to be between 350 and 360 million. This reflects the uncertainty we have as to whether road crews will have the time to make up the lost sails due to adverse weather. Higher CTO costs and inventory affecting performance chemicals' bottom line and a lack of industrial recovery that could affect both APT and our oleo-based products in the industrial specialties line.
Mary: and adjusted EBITDA guidance to be between $350 million and $360 million.
John Fortson: We can't control the weather, but we can control how we reposition our performance chemical segment to deliver sustained profitability. We remain confident that Ingevity will emerge from 2024 stronger and better. There are nearly 200 million outflows on that free cash flow table that won't be there next year. We are working to deliver mid to high 20% margins on a consolidated basis and generate over $150 million a year in free cash flow, which we will use to deliver the balance sheet and then return cash to shareholders.
Mary: We can't control the weather, but we can control how we reposition our performance chemical segment to deliver sustained profitability.
Mary: There are nearly 200 million of outflows on that free cash flow table that won't be there next year.
Mary: We are working to deliver mid to high 20% margins on a consolidated basis and generate over 150 million dollars a year in free cash flow, which we will use to deliver the balance sheet and then return cash to shareholders.
John Fortson: With that, I'll turn it over to questions. Thank you. We will now begin the question and answer session. If you would like to ask a question, please press star followed by one on your telephone. If, for any reason, you would like to remove that question, please press star followed by two. Again, to ask a question, press star, then one.
Speaker Change: With that, I'll turn it over to questions.
Operator: And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question. We will pause here to briefly pass questions over to you. We have the first question from John McNulty with BMO Capital Markets. You may proceed, John.
Operator: Again, to ask a question press star then 1.
Speaker Change: And as a reminder, if you are using a speakerphone, please remember to pick up your handset before asking a question.
Mary: We will pause here briefly if all questions are registered.
Speaker Change: We have the first question from John McNulty with BMO Capital Markets. You may proceed, John.
John Mcnulty: Yeah, thanks for taking my question. Obviously, there is a lot going on and a lot to unpack. So I guess the first thing I wanted to understand better is you're going to continue to have kind of the CTO high cost pressures through the first quarter, and then they should drop off to kind of a market level. If today's market was kind of what you see, whatever, say Q2 of next year, how much of a quarterly benefit would that be on the market pricing versus the stuff that you're working through in your inventory right now? How should we think about that? Yeah, so, you know, John.
John Mcnulty: Yeah, thanks for taking my question. Obviously a lot going on and a lot to unpack. So I guess the first
John Mcnulty: thing I wanted to understand better is you're going to you're you're going to continue to have kind of the CTO, high cost pressures through the first quarter, and then they should drop off to kind of more market level. If
Speaker Change: If today's market was kind of what you see, whatever, say Q2 of next year, how much of a quarterly benefit would that be on the market pricing versus the stuff that you're working through in your inventory right now? How should we think about that?
John Fortson: Probably the simplest way to think about that is... I think we expect the price that we're paying for CTO in a given quarter is probably going to fall by half. It's going to be half. Well, roughly, I mean, you know, obviously the market will do what the market will do. And we're talking about nine months away, eight months away. But, you know, our expectation, based on what we're seeing today and where the market is, is that starting in Q2 of 2025, First off, we're not buying any more off-market CTO now, right?
John Fortson: Yeah, so, you know, John.
John: Probably the simplest way to think about that is
John: I think we expect the price that we're paying for CTO in a given quarter is probably going to fall by half. It's going to be half.
John: Well, roughly, I mean, you know, it's obviously the market will do what the market will do. And we're talking about nine months away, eight months away, but.
Mary: Our expectation, based on what we're seeing today and where the market is, is that starting in Q2 of 2025,
John Fortson: So the cash drain piece is nipped, right, or cauterized. So while we, but we will be running, as we alluded to, this higher inventory CTO through our, you know, through our plants and, therefore, through our P&L, right, but by the second quarter of next year, we will be running a lower cost CTO that we will be procuring in the open market, and that cost should be about half of what we Assuming today's level.
Mary: First off, we're not buying any more off-market CTO now, right, so the cash drain piece is nipped, right, or cauterized.
Mary: But we will be running, as we alluded to, this higher inventory CTO through our plants and therefore through our P&L.
Mary: By second quarter of next year, we will be running a lower cost CTO that we will be procuring in the open market. And that cost should be about half of what we're paying today.
John Fortson: Yeah, I mean, it may be better than that, candidly, but I don't. I think half is probably the right way to think. Okay, got it. That's helpful.
John Fortson: assuming today's level. Assuming today's level. Yeah, I mean it may be better than that, candidly, but I don't, I think half is probably the right way to think about it.
John Mcnulty: And then on the paving business, so it sounds like you lost, I don't know, somewhere in the neighborhood of 15 to 25 million or so on wet weather or so, and it sounds like that's going to also impact you and tweak you. So whatever, let's call it 40 plus million dollars of revenue that may be getting pushed out. I guess, if that can't be made up this year, should we assume that that gets added to next year? Or is it with municipalities, it's kind of a, look, you use your budget this year, you don't, if you don't, it's not like you get to push it to the following year, I guess.
Speaker Change: Okay, got it. That's helpful. And then on the paving business, so it sounds like...
Speaker Change: You lost, I don't know, somewhere in the neighborhood of 15 to 25 million or so on wet weather or so. And it sounds like that's going to also impact you and tweak you. So, whatever, let's, let's call it 40.
Mary: plus million dollars of revenue that
Mary: that may be getting pushed out. I guess if...
Mary: If that can't be made up this year, should we assume...
Speaker Change: But that gets additive to next year, or is it with municipalities? It's kind of a look. You use your budget this year. You don't if you don't, it's not like you get to push it to the following year. I guess. How should we be thinking about that? Because it does seem like a lot of high value.
John Fortson: How should we be thinking about that? Because it does seem like a lot of high-value products for you that have at least temporarily been kind of sidelined. Well, so, I mean, a couple of things about that question, right? And Rich is here, so you can chime in, Rich, but... You know, the weather, there's no doubt we're having sort of a weird weather year, right? So the paving season got off to a bad start, and this has happened to us in the past, right?
Mary: you know, high value product for you that at least temporarily has been kind of sidelined.
John Fortson: Well, so, I mean, a couple things in that question, right? And Rich is here, so you can chime in, Rich, but...
Rich: So the paving season got off, and this has happened to us in the past, right? The paving season got off to a slow start. Then it kind of fired back up. Then we sort of had some weather in Texas in July, which has made July a little soft.
John Fortson: The paving season got off to a slow start, then it kind of fired back up, then we sort of had some weather in Texas in July, which has made July a little soft, you know, and we'll see what August and September hold. There is, you know, as I alluded to in my comments, the pavers are incentivized to go as long as they can, right? And so to the extent the weather pattern shifts and we're able to pave later into the season, you know, we may have a stronger than normal sort of first couple months of Q4, and we've seen that happen before, right?
Mary: are incentivized to go as long as they can, right? And so to the extent the weather pattern shifts and we're able to pave later into the season,
John Fortson: So, but it's too early to call, and we are sort of having a strange weather year, so we're taking a prudent approach. With regard to rollovers to next year, it has been our experience that, you know, funding is put in, and pavers will roll back to the next year. Meaning that, you know, they have a plan, they allocate money to it, they get it done, they don't get it done, it will bode well for next year because it'll get pushed. But we also have to take that year on year, right? Because, you know, we have to see what the environment is like.
John Fortson: You know we may have a
John Fortson: stronger than normal sort of first couple months of Q4. And we've seen that happen before, right? So, but it's too early to call and we are sort of having a strange weather year. So we're taking a prudent approach. With regards to
John Fortson: rollovers to next year. It has been our experience.
Mary: that, you know, funding is put in and pavers will roll back to the next year, meaning that
John Fortson: They have a plan. They allocate money to it. They get it done. They don't get it done. It will bode well for next year, because it will get pushed. But we also have to take that year on year, right?
John Fortson: Directionally, you know, paving, interest in paving, and efforts to continue to pave and spend on infrastructure remain strong. But, you know, that does, that would be the normal pattern. Okay. And if I could sneak in, maybe one last one.
John Fortson: We have to see what the environment is. Directionally, interest in paving and efforts to continue to pave and spend on infrastructure remain strong, but that would be the normal pattern for us.
John Mcnulty: The $30 to $35 million that you expect to save from the Crossit rationalization, I guess, should we be thinking about that coming through evenly? Is it back-end loaded for 2025? I guess, how should we be thinking about that? Well, it's even in the sense that the plant will cease operations here very shortly, right? So by the end of the year, the full benefits will be rolling through in 2025. You know, just to sort of build on the comments that were prepared, John.
Speaker Change: Got it. Okay, and if I could sneak in maybe one last one. The $30 to $35 million that you expect to save from the Cross-IT rationalization, I guess, should we be thinking about that even coming through evenly? Is it back-end loaded for 2025? I guess, how should we be thinking about that?
Speaker Change: Well, it's pretty even in the sense that the plant will cease operations here very shortly, right? So by the end of the year, the full benefits will be
John Mcnulty: rolling through in 2025. You know, just to sort of build on the comments that were prepared, John.
John Fortson: You know, you can look at those numbers and obviously deduce that the fixed cost of trying to run that site because it is a refinery, so it needs high utilization to make it operate, right? And we are just basically taking an operating philosophy now that we're going to build it as we go, right? So we were hopeful, and I think in a stronger industrial environment, thought that the utilization could pick up at that site quickly enough that we wouldn't need to take these actions.
John Fortson: You know, you can look at those numbers and obviously deduce that the fixed cost of trying to run that site.
John Fortson: because it is a refinery, so it needs high utilization to make it operate, right? And we are just basically taking an operating philosophy now that we're gonna build it as we go, right? So we were...
John Fortson: hopeful, and I think in a stronger industrial environment.
John Fortson: thought that the utilization could pick up in that site quickly enough.
John Fortson: But we were confronted with a choice of not knowing and having some uncertainty as to what the next couple of years' impacts should be from an earnings perspective versus using an existing refinery. It's a secondary refinery that we have in Charleston that, for a very modest amount, we're gonna build as we grow, right? So, as I alluded to in my comments, with a very modest investment, we can kind of get 50% of the output across it, and we'll just make those capacity expansions as needed. But we're not abandoning or changing the overall AFA approach. I got it. Okay. Thanks very much.
Speaker Change: that we wouldn't need to take these actions, but...
John Fortson: what we're, you know, we were confronted with a choice of not knowing and having some uncertainty as to what the next couple years impacts should be from an earning perspective.
Speaker Change: versus using an existing refinery, it's a secondary refinery that we have in Charleston that for very modest amount, we're gonna build it as we grow, right? So, you know, as I alluded to in my comments with very modest investment, we can kind of get 50% of the output across it.
John Fortson: and we'll just make those capacity expansions as needed, but we're not abandoning or changing the overall AFA approach.
Speaker Change: Got it. Okay. Thanks very much. All makes sense. Appreciate it.
John Mcnulty: All makes sense. I appreciate it. Thank you, John. We now have Daniel Rizzo with Jeff.
Daniel Rizzo: Good morning, and thank you for taking my call. Once you make the changes and move to North Charleston, what will your capacity utilization be for refining at that site? Well, we don't, really haven't always discussed this, but obviously... It's going to improve, right because we're moving utilization from Crossit to Charleston, but we have plenty of room to expand capacity both on the CTO and non-CTO. CTO and oleo-based refining, right? So we feel comfortable that we can expand and produce going forward there.
Daniel Rizzo: Thank you John. We now have Daniel Rizzo with Jeffreys
Speaker Change: Good morning and thank you for taking my call. Once you do the changes and move to North Charleston, what will be your capacity utilization for refining at that site?
Daniel Rizzo: Well, we don't.
Daniel Rizzo: really always discuss this, but obviously it's going to improve, right, because we're moving utilization from CrossFit to Charleston, but we have plenty of room to expand capacity both on the CTO and non-CTO.
Daniel Rizzo: CTO and oleobased refining, right? So we feel comfortable that we can expand and produce
Daniel Rizzo: And as I kind of alluded to, we can build as we grow back by making relatively modest changes to how we do things to expand that utilization, right? I mean, we will invest in Charleston as needed, but we can do it in a more capital efficient manner versus the current footprint that we're sitting here today, right? And I think it's important, as you've said, everyone on this call understands.
Daniel Rizzo: Going forward there. And as I kind of alluded to, we can we can build as we grow back by making relatively modest changes to how we do things to expand that utilization. Right. I mean, we will
Daniel Rizzo: invest in Charleston as needed, but we can do it in a more capital efficient manner versus the current footprint that we're sitting here today, right?
John Fortson: I mean, we've gone from what was a three plant network down to a one plant network. And so the throughput and absorption you're going to get on a consolidated basis by doing that is pretty significant, but that has to be done when you look at the changes in the cost structure that's happening in that business, right? And so that's the math, and that's the work that we've been doing over the course of.
John Fortson: And I think it's important, as everyone on this call understands, I mean, we've gone from what was a three-plant network down to a one-plant network, and so the throughput and the absorption you're going to get...
John Fortson: on a consolidated basis by doing that is pretty significant, but that
John Fortson: has to be done when you look at the changes in the cost structure that's happening in that business, right? And so that's the math and that's the work that we've been doing over the course. Well, it really started in November of last year, right?
John Fortson: Well, it really started in November of last year. So, I mean, when you say just you can expand as needed, would that be just some simple thing like de-bottlenecking? Or is it less than that? I mean, it's de-bottlenecking, it's piping. These are, you know, relatively modest things that, frankly, plants are always doing.
John Fortson: So, I mean, would you, when you say just you can expand as needed, would that be just some simple like debottlenecking or is it, is it less than that? I mean, is it just... It's debottlenecking, it's piping, these are relatively modest things that, frankly, plants are always doing, but...
John Fortson: But, you know, because this is a, you know, it's a very large site, one that we've operated for a long period of time, there's, we have a pretty robust and pretty clear, which is what we spent the last six, nine months doing, sort of trying to lay out what this would look like. Okay. And then finally, I think you mentioned that lower energy was a tailwind, I think you said in the performance materials. I was wondering what the percentage of COGS energy is.
John Fortson: because this is a very large site, one that we've operated for a long period of time, we have a pretty robust and pretty clear.
Speaker Change: Okay. And then finally, I think you mentioned that lower energy was a tailwind. I think you said in performance materials. I was wondering what percentage of COGS energy is. Is it significant?
John Fortson: Is it significant? It's very significant. I mean, beyond the raw material costs of basically sawdust and phosphoric acid. It is a big burner of natural gas, right? And it's a big explanation of what's been transpiring in that margin. I thank you very much.
John Fortson: It's very significant. I mean beyond the raw material costs of basically sawdust and phosphoric acid
John Fortson: It is a big burner of natural gas, right, and it's a big explanation of what's been transpiring in that margin.
Speaker Change: Okay. All right. Thank you very much.
Daniel Rizzo: Thank you, Daniel. Your next question comes from Jonathan Tanwanteng with CSG Security. Hi, good morning.
Speaker Change: Thank you, Daniel. Your next question comes from Jonathan Tamlinton with CSG Securities.
Jonathan Tanwanteng: Thank you for the question. I wanted to focus on the outperformance in the material, which has really been fantastic. I heard the commentary on the margins, which is great, but I was wondering if you could speak to the revenue run rate. Do you think hybrid and ICE cars will continue to sustain that kind of revenue run rate, or is there... you know, the more of a redemption, and others? I guess challenges as EV and other things pick up in the second half and through the near future. And Ed's sitting next to me, so he can chime in as appropriate.
Speaker Change: Hi, good morning. Thank you for the question. I wanted to focus on the outperformance in the materials business, which has really been fantastic.
Jonathan Tanwanteng: I heard the commentary on the margins, which is great, but I was wondering if you could...
Ed: speak to the revenue run rate, and if that is sustainable going forward, do you think hybrid and ICE cars continue to sustain that kind of revenue run rate, or is there more of a resumption of other
Ed: I guess challenges as EV and other things pick up in the second half and through the near future.
Jonathan Tanwanteng: [inaudible]
Jonathan Tanwanteng: And Ed's sitting next to me, so he can chime in as appropriate.
John Fortson: I think we feel pretty good that the revenue environment that we're operating in today is going to be around for a while, right? And we feel good, as Mary alluded to in her prepared comments, certainly about the remainder of 2024. So I think we feel good about a more extended period. And I would refer you back to the prepared comments because what's really going on here, John.
John Fortson: I think we feel pretty good.
John: that the revenue environment that we're operating in.
John Fortson: today is going to be around for a while, right?
John Fortson: And we feel good, as Mary alluded to in her prepared comments, certainly about the remainder of 2024, but I think we feel good.
John Fortson: in a more extended period. And I would refer you back to the prepared comments because what's really going on here, John, and it's...
John Fortson: It's I know there's lots of put and takes with auto production, and then you know what a hybrid is versus what is an all-electric vehicle, but simply put, what's really happening here is the value that that business is getting towards products, right? coupled with the cost savings that that team has put in. And as we alluded to, I mean, a number of these are structural, right? We are using less energy. This is a, These are basically large kilns, right?
John Fortson: It's I know there's lots of puts and takes with auto production. And then, you know, what is a hybrid versus what is an all electric and but simply put
John Fortson: What's really happening here is the value that that
John Fortson: business is getting towards products, right, coupled with the cost savings that that team has put in. And as we alluded to, I mean, a number of these are structural, right? We are using less energy. This is a
John Fortson: So they're burning a lot of natural gas, right? Those two things are more than offsetting, effectively reducing the effectiveness of auto production, and that's kind of bouncing around depending on what region you're in or what have you, and the adoption of all electric vehicles. Because remember, we are on the hybrid, and I think our strategy will be to continue to pull the levers that we have to deal with the puts and takes of the auto industry. And we do feel very good, though, certainly about the remainder of this year and the next couple of years. Got it. Thank you.
John Fortson: These are basically large kilns, right? So they're burning a lot of natural gas, right? Those two things are more than offsetting
John Fortson: effectively softness of auto production and that's kind of bouncing around depending on what region you're in or what have you.
John Fortson: The adoption of all electric vehicles. Because remember, we are on hybrid. Right. And I think our strategy will be to continue to pull the levers
John Fortson: that we have.
John Fortson: to deal with the puts and takes of the auto industry. And we do feel very good though, certainly about the remainder of this year and in the next couple of years.
Jonathan Tanwanteng: And then just within the guidance, are you expecting any sequential improvements in pavement number one? And number two, are you including any restructuring savings this year? I know you said 30 to 35 next year, but seeing as this plan is closing in August, are you realizing anything? Yeah, so I mean, it is August, right? Also, I'll take the last part first.
Jonathan Tanwanteng: Got it, thank you. And then just within the guidance, are you expecting any sequential improvements in pavement, number one?
Speaker Change: and number two are you including any restructuring savings in this year? I know you said you know 30 to 35 next year but seeing as this plant closing in 20 in August are you realizing something you know Q3 and Q4?
John Fortson: By the time these closures occur over the next couple of months, the ability to really significantly impact 2024 is fairly modest, right? But there will be some, but pretty modest, right? because you're talking about something, you know, really starting to see it sometime in Q4, right? By the time you sort of get all this done, right? With regard to paving... You know us well enough; we tell it as we see it, and we try to be as transparent as we can.
Speaker Change: Yeah, so, I mean, it is August.
John Fortson: Also, I'll take the last part first, by the time these closures occur over the next couple of months.
John Fortson: The ability to really significantly impact 2024 is fairly modest, right? But there will be some, but pretty modest, right?
John Fortson: because you're talking about something, you know, really starting to see it sometime in Q4, right, by the time you sort of get all this done, right?
John Fortson: With regards to paving, you know us well enough, we tell it as we see it, right, and we try to be as transparent as we can.
John Fortson: We had a weak start to the year, and then we'll see what happens in October and November, right? Because this has happened to us in the past. It's not a normal year, but if the weather holds, the pavers will go into the fourth quarter as long as they can to make up for this lost business, right? But if the weather doesn't hold, then they can't, and then those projects will get pushed into next year.
John Fortson: We had a weak start to the year.
John Fortson: We had a weak first month, good two months, right? Now we've had kind of a weak July. We are going ahead and talking about that because it's true and people saw the storms, right? We'll see what August and September holds.
John Fortson: and then we'll see what happens in October and November, right, because this this has happened to us in the past, it's not a normal year, but
John Fortson: If the weather holds, the pavers will go into the fourth quarter as long as they can to make up for this lost business, right? But if the weather doesn't hold, then they can't, and then those projects will get pushed into next year.
Speaker Change: That's an assumption we can't make, right? So we are taking a conservative position based on what we know, and we'll see how the year pans out.
Speaker Change: Understood, thank you.
John Fortson: Thank you. As a reminder, if you'd like to ask any further questions, please press star followed by one on your telephone keypads now. And we now have Mike Swissman with Wells Fargo. You may proceed.
John Fortson: So, And we now have Mike Fishman with Wells Fargo; you may proceed, stronger in 2025. What I would tell you is that, Right. This is the baseline for what, 25?
Mike Fishman: Hey, good morning.
Mike Fishman: What's the run rate sales for performance chemicals as we head into 2025?
Mike Fishman: Is it a $600 million business, $500 million business? Just trying to figure out kind of how that sort of shakes out with the...
Speaker Change: with the restructuring.
John Fortson: [inaudible]
John Fortson: We're not, Mike, we're not, it's the 1st of August, right, so we're not...
Speaker Change: really talking about, and I understand that people want to look beyond this, and so what we're saying is that, as we've sort of been clear all year, this is the year we're going to fix this business so that we can emerge
Mike Fishman: stronger in 2025. What I would tell you is, is that
Speaker Change: the sales impact of shutting
Speaker Change: Cross it is going to be relatively de minimis right because we're transferring all that
Speaker Change: to Charleston, right, so
Mike Fishman: You know, I would encourage you to look at thinking about the quarters of this year and making some annualization because
Speaker Change: really what we've done. We don't have DeRidder this year. We've been operating with Charleston and Crossit, and Crossit was not a revenue generator per se.
Mike Fishman: And those revenues will transfer, right? We're not losing. So I would encourage you to think about what the annualization looks like for 2024.
Mike Fishman: This is the baseline for what 25 would be.
Mike Fishman: Got it. And then...
Mike Fishman: I mean, I get it. I mean, it's a tough question, but what gives you confidence that as we head into second quarter twenty five that when you need CTO.
Mike Fishman: supply that prices will be better than they are now? That's a tough question, sorry. There's really two things that I would point you to. You could argue a third, but
John Fortson: One is, we know with great clarity how far off the prices we've been paying. And as I said, that benefit should be half. It's probably a good place to start, right?
John Fortson: One is, we know with great clarity
John Fortson: and I recognize we don't disclose this to the broader market, but we know with tremendous clarity
John Fortson: how far off the prices we've been paying
Speaker Change: our supplier were with what
John Fortson: was available in the market, meaning what we were buying or could have bought from other parties, what we believe our competitors were buying it at, what transactions we're seeing in that market, right? We know some of that because we were selling CTOs, right? So we know, right?
John Fortson: Now, we alluded to this earlier, and as I said, you know, that benefit should be half is probably a good place to start, right?
John Fortson: Now. You say to yourself, and I understand this, okay, well, you know, the market is the market. What makes you feel confident that the market will stay? The biofuels industry is not consuming as much yet as what could arise at some point. So their demand for this product is relatively muted, right? And over the last, and then shutting Derrida, we've eliminated 200 plus thousand tons of demand for this stuff that used to be in the marketplace, right?
John Fortson: Now,
John Fortson: You say to yourself, and I understand this, okay, well, you know, the market is the market, what makes you feel confident the market will stay
John Fortson: It may move around, but we've got a lot of playroom for where we were, right? What I would also say is we're in a weak economic environment.
John Fortson: Right, and so demand is not as robust as it can be.
John Fortson: The biofuels industry is not consuming as much yet.
John Fortson: is what could arise at some point. So their demand for this product is relatively muted, right? And over the last...
John Fortson: however many months, you know, by terminating these contracts and by closing, first by moving CrossFit to an AFA based
John Fortson: plant, and then shutting Derrida, we've eliminated 200-plus thousand tons of demand for this stuff that used to be in the marketplace, right? So supply-demand economics...
John Fortson: would tell you that the price for CTO should remain relatively muted.
John Fortson: There is a new source of demand with the biofuel stuff, but that demand it seems is pretty known, right? And is relatively muted. So I think we can state with some comfort
John Fortson: although nothing is certain, but...
Speaker Change: We're gonna benefit next year from two things. One is we're gonna have a reduced cost structure, which we've pointed to today.
John Fortson: First was what we did in Gerriter in November, now is what we have announced today.
Speaker Change: And that has some real value, and you can look at the math of what we disclosed. And then we told you that our CTO costs should come down.
Speaker Change: A lot. So this is all a part of getting this business back to profitability and positive cash generation.
John Fortson: But that footprint, those footprints are done. I mean we're down to one...
John Fortson: on site, right? So those things are, you know, that's happened.
Speaker Change: Right, and then so I guess final question. Just if I think about industrial specialties.
John Fortson: as it is going forward.
Speaker Change: what do you need to see in terms of profitability, returns?
Speaker Change: It's a fairly small business now relative to the portfolio.
Speaker Change: And I guess, is there a hurdle rate where you need to get to where, and if you don't, is it potential that
Speaker Change: you have to either divest it or move on from the business? Or is there at least a fundamental reason you think that this will be a good business longer term?
John Fortson: [inaudible]
Speaker Change: Listen, we always reserve the right, as we've said, to assess the portfolio and
John Fortson: So supply, demand, and economics make adjustments to optimize Ingevity, right? I mean, we've got a business that, even with all this noise, has margins of like 26%, right? So, you know, we want to get this cash position. To me, that's been a problem, right? I mean, we're not starting to generate cash again and get that debt back down, right?
John Fortson: make adjustments to optimize and get it right. I mean, we've got a business that even with all this noise has even margins of like 26%. Right. So, you know, we want to get this cash position. To me, that's that's been a problem, right? I mean, we're not
John Fortson: We're relatively highly levered in today's market and we you know our cash generation has been impacted by this so we have
John Fortson: can cauterize that and can move forward.
John Fortson: starting to generate cash again and get that debt back down, right? So the...
Speaker Change: What I would tell you is, is that we're focused, you know, we're focused on getting this business back to what we would call, you know, an acceptable level of profitability. And, you know, I've laid out for you all the
John Fortson: Structural things that will happen with reduced footprint costs and with CTO savings.
John Fortson: and then we need to then factor in the market itself, right? So is this a 2022 market? It is not, right? This is not a post-COVID balance market.
Speaker Change: But, you know, the industrial markets, at least this year, have remained relatively benign. And we're not talking about, you know, 25, we'll have to see, right?
Speaker Change: I was reading yesterday, there's talk of rate cuts and other things, so we'll see where that goes, but
John Fortson: Our focus is, let's get the cash generation, let's stop that bleeding and reverse it back to a more normalized footprint. And then let's get this business back to acceptable levels of profitability.
Speaker Change: Great, thank you.
Speaker Change: Thank you.
Speaker Change: I would like to hand it back to...
John Fortson: John Nypaver, Fortson, final remarks.
John Fortson: Thanks, Brika. Thanks, everyone, for joining us. That concludes our call. And we'll speak with you again next quarter.
Speaker Change: Thank you all for joining the Ingevity second quarter 2024 earnings call and webcast. Please enjoy the rest of your day and you may now disconnect from the call.