Q1 2025 Ingevity Corp Earnings Call
Speaker Change: This is a holding announcement to the Ingevity first quarter, 2025 burning school and webcast. It will begin in approximately one minute's time. Thank you for your patience.
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and John Fortson. Thank you. Thank you.
Adam: Good morning, all good afternoon, all welcome to the Ingevity First Quarter, 2025 at Animals School and Webcast. My name is Adam and I'll be reprated today. If you'd like to ask a question during the Q&A portion of today's school, you may do so by pressing style full of by one on your telephone keypad. Oh now, hand the floor to John Nypaver to begin to John , please go ahead when you're ready.
John Nypaver: Thank you, Adam. Good morning and welcome to Ingevity's first quarter 2025 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 measures .
John Nypaver: 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, 10K.
John Nypaver: 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.
David Lee: Our agenda is on slide three. Our speakers today are David Lee, our CEO and Mary Dean Hall, our CFO .
Rich White: Representing our businesses today and available for questions and comments are Rich White, President of Performance Chemicals, Michael Schuchof, President of Advanced Polymer Technologies, and Jonathan MacIver, VP of Global Commercial for Performance Materials
Rich White: They will provide introductory comments. Mary will follow with a review of our consolidated financial performance and the business segment results for the first quarter. They will then provide closing comments and discuss 2025 guidance. With that, over to you Dave.
Dave Lee: Thanks, John , and good morning, everyone. The company delivered a strong first quarter. Reflecting the priorities with outline in previous earnings calls, including driving increased profitability, generating strong free cash flow.
and Improving Leverage.
Dave Lee: Our results demonstrate meaningful progress on those commitments, including our fourth consecutive quarter of year-over-year margin expansion.
Dave Lee: This quarter was an example of the best-in-class profitability Ingevity is capable of, and I believe we're just getting started.
Dave Lee: I'd also like to take a moment to share how excited I am to be here today.
Speaker Change: As some of you know, I've spent my career in the specialty chemicals and materials industry and was most recently the CEO of a specialty materials company that was primarily focused on semiconductors as an end market.
Speaker Change: which roommate to Ingevity was the incredible potential that I see in the company, our people, and our products and technology.
Speaker Change: I'd also like to thank and acknowledge the board, particularly Luis Fernandez Moreno, who acted as interim CEO and Ingevity employees for planning a seamless and thoughtful transition.
Speaker Change: I felt welcome from day one and I look forward to what we can accomplish together.
Speaker Change: Also, as announced at our recent annual meeting, Bruce Hopener, who has served on our board since 2022, has been elected as chair, succeeding Jean Blackwell.
Speaker Change: Jean will remain on the board and I want to express my deep appreciation for her leadership and ongoing support.
Speaker Change: I'm also excited to work with Bruce in his expanded role.
Lastly, I want to briefly address the broader operating environment.
Speaker Change: We are actively monitoring developments related to tariffs and macro-demand conditions.
Speaker Change: We'll cover this in more detail later, but briefly from a tariff standpoint, we believe the direct impact to our business will be minimal.
Speaker Change: and we have mitigation plans underway to manage any near-term effects.
Speaker Change: A macro-demand, particularly related to consumer sentiment and auto sales.
Speaker Change: We've widened our guidance range to be in line with the latest auto industry forecast.
Speaker Change: which reflect an approximately 10% year-over-year decline in North American auto-production versus prior expectations.
when we delivered guidance in February .
Speaker Change: Despite these headwinds, I believe Ingevity is well-positioned to deliver strong profitability in 2025 and beyond.
Speaker Change: Our focus will remain on the discipline execution of our strategy to optimize the portfolio and drive business performance which should create significant value for our shareholders.
Speaker Change: With that, I'll turn it over to Mary. Nice day. Good morning, Hall. Please turn to slide five.
Mary: First quarter sales of 284 million were down 17% versus Q1 last year due primarily to our repositioning actions in performance chemical and weak industrial demand which also impacted advanced polymer technology sales.
Our Adjusted Gross Profit of $129 million was up 10%
with Gross Margin improving over 1,000 basis points.
Mary: reflecting the successful execution of repositioning actions that included the exit of lower margin and markets, cost-saving actions, and lower CTO costs.
Mary: Adjusted SG&A dollars were down compared to last year but did increase as a percentage of net sales due to the lower revenue.
Mary: Justity Bada was up 17 million and margins improved from 21.9% to 32.1%.
Mary: This is our fourth consecutive quarter of year-over-year growth margin and EBITDA margin improvement.
Mary: A key goal of our repositioning actions was to reduce our exposure to lower margin and markets.
Mary: And you see in the chart, on the bottom right of this slide, how our most profitable businesses now represent the dominant portion of total company sales, driving overall improvement in profitability.
Please turn to slide six.
Mary: The key takeaway from this slide is that our successful execution of repositioning and improved working capital is driving strong free cash flow, which combined with improving EBITDA is
Mary: Free cash flow of $15 million improved $44 million from Q1 last year, primarily reflecting repositioning benefits, including lower exposure to CTO.
Mary: The chart in the upper left shows our net leverage continuing to improve ending the quarter at 3.3 times.
Mary: As we move into the summer months and our road tech business ramps up, we expect to generate strong free cash flow, especially in the second half of the year. We are affirming our prior guidance of leverage less than 2.8 times by the end of this year.
Mary: Turning to slide seven, performance materials had higher sales due to favorable regional and product mix, as well as our annual price increases.
Mary: In Q1, we saw volume growth in China as government incentives drove higher vehicle sales. We also saw growth in the rest of Asia Pacific as exports to the US increased in anticipation of higher tariffs.
Mary: We saw a similar increase in volume toward the end of the first quarter in North America, although volumes for the entire quarter were down year over year.
Mary: However, a favorable mix in North America offset the lower volume as we saw demand increase for hybrids and for more fuel-efficient vehicles such as those with turbo or stop-start
Mary: These technologies require more of our higher value activated carbon, even if overall carbon volume is lower in the vehicle.
Mary: We also implemented our annual price increases during the quarter, which contributed to the increase in sales. EBITDA margins remained near 54% for the quarter.
[inaudible]
Mary: Based on the latest auto industry forecast for this year, which now show a 9% to 10% decline in North America versus the prior forecast.
Mary: We estimate that segment EBITDA could be lower by $15 to $20 million and we have lowered the bottom end of our guidance to reflect this possibility.
Mary: However, keep in mind that the average age of an automobile in the US is at an all-time high around 14 years old and at some point these vehicles will need to be replaced.
Mary: Also, please remember that we can pivot to the filtration markets if auto production weekends. And while these are lower margin markets than auto, we have this and other levers to mitigate the impact.
Mary: For full year 2025, we continue to expect segment margins around 50%.
Mary: With respect to Terrace, to the extent they lead to actual declines in global auto production, the sensitivity analysis I just discussed would apply.
Mary: In terms of direct impacts due to tariffs, our performance materials business does ship some materials from our U.S. plans to our China plans.
Mary: Mitigating actions we are taking to minimize the impact from China-imposed tariffs, include utilizing existing in-country inventory, expanding localization of material sourcing, and adjusting price we are appropriate.
Mary: We believe these actions would largely offset the impact of China tariff.
Please turn to Slide 8.
Mary: APT had lower overall sales in the quarter with volumes max depending on the region. North America and Amia volumes were higher, while volumes in Asia were down, primarily due to customers working through existing inventory, and we saw increased competition which put downward pressure on price.
Mary: Eba Duff to the Quarter was higher by $3 million and margins increased to 29.6%.
Mary: This increase was driven primarily by higher utilization rates at the plant as we built inventory to prepare for an extended plant outage in the second quarter to install new boilers.
Mary: On a full-year basis, we expect margins for this segment to be approximately 20%.
Mary: With respect to tariffs, we currently do not expect a material direct impact on APT, as our manufacturing operations are in the UK, and many of the products are exempt from tariffs.
Mary: We are pleased to introduce a new member of our leadership team.
Mary: Michael Schukoff joined us as president of APT in March. He's an accomplished, specially chemical executive who brings over 25 years of experience, transforming business profitability and driving growth in new markets at global companies.
Mary: Michael will focus on accelerating profitable segment growth across product lines and geographies and driving operational excellence to reduce costs.
Please turn to slide 9 for performance chemicals results.
Mary: Sales for the segment were lower by 35%, primarily as a result of our repositioning actions.
Mary: Industrial Specialties had revenue of $51 million, which is in line with our Go Forward quarterly run rate expectations of $40 to $50 million of sales per quarter.
Mary: Road text sales were down slightly from last year in this seasonally slow period.
Mary: Maintaining the momentum from the second half of last year, segment EBITDA showed year-over-year improvement of $10 million dollars.
Mary: The key drivers of this improvement were lower CTO costs which peaked in Q1 of last year and cost savings as a result of successful repositioning actions.
Mary: We continue to expect the high cost inventory purchased last year to negatively impact margins through Q2, but also expect full-year segment EBITDA margins in the mid-to-high single digits.
Mary: Our discussions with interested parties regarding strategic options for industrial specialties and the North Charleston refinery are progressing well and we expect to communicate a path forward before the end of the year.
with respect to Tara.
Mary: This segment has all its manufacturing assets in the US, and the majority of its sales are within the US. In addition, the raw materials we purchase are either sourced in the US or exempt from announced tariffs.
Therefore, we currently expect minimal direct impact from Tara.
Mary: In summary, our results demonstrate our progress in improving profitability and reducing leverage, and we expect this momentum to continue through the year, and I'll now turn the call back today for an update on guidance and closing comments.
Thanks, Mary. Please turn to slide 10.
Mary: As I mentioned earlier, we continue to monitor the evolving macro landscape, including the implications of recent tariffs and broader global uncertainty.
We intend to manage our business with discipline and flexibility.
Mary: Guided by what we see from our customers and supported by industry forecasts.
Mary: as well as further mitigation plans, including pricing surcharges, inventory management, and additional localization efforts.
Mary: However, based on the latest third-party projections for North American auto-production
Mary: We've made the decision to adjust the low end of our full year guidance to account for the potential slowdown in production.
Mary: As noted on slide 10, we've widened our guidance range for sales and EBITDA to reflect the impact of a 10% reduction in North American auto production in line with the most recent industry
This should also provide some sensitivity to our business.
Should end market demand conditions further deteriorate.
Mary: So far in Q2, we've not seen material shifts in customer order patterns in our performance materials business.
and the positive momentum we saw in March continued into April .
Mary: While we recognize the challenges ahead, we remain focused and continuing to execute against our commitments.
Mary: to improve profitability and reduce leverage and are confident in our ability to navigate this environment and continue to deliver value for our shareholders.
With that, I'll turn it over for questions.
John , John , John , John , John , John
Speaker Change: As a reminder, if you'd like to ask a question on today's call, please press star
Speaker Change: And our first question comes in John McNulty from PMO Capital Markets. John , your line is open, please go ahead.
Thank you.
John Mcnulty: Good morning, thanks for taking my question and Dave, congratulations on the role, great to have you in the seat.
Thank you. I guess first you want to do just
Speaker Change: Sure. Just wanted to dig into the performance materials business. Can you speak to the pricing that you're seeing right now and where you might be looking to take that given some of the issues you spoke to about tariff and working around some of the tariff issues?
Speaker Change: Right, so thanks for the question. I'll let Mary take the specifics on pricing, but from a performance material standpoint, obviously we think we have a very strong position.
Speaker Change: Great Technology, and you know, this quarter we saw a very strong performance, and we've mentioned it in my comments that we continue to see that strength that we saw in the later part of the quarter continuing to April .
Speaker Change: and everyone's watching this sort of environment of uncertainty, but so far what we've seen is pretty encouraging. Mary, why don't you talk to the pricing? Sure, and so as we've talked out before.
Mary: John in this business, the performance materials business, we do typically do a once a year kind of the annual price increase. This year was normal course of business from that regard.
Clearly, it is a lever we can pull.
to the extent that we do see.
Mary: Production began to decline or tear-off impacts that are unexpected, etc. But again, to date, we're not seeing that.
So, we have-
You know, Price is one of the tools in our tool kit.
Mary: that we can use as a mitigating lever, but as David mentioned, there are others, again, increasing localization efforts where there might be a tariff impact, for example, so far business as usual on that front.
Speaker Change: And John , I'll just add to Mary's comments, you know, we feel like from a tariff perspective.
John: We're really well positioned, and I think you know that following the company for as long as you have. That's a tough place.
John: Primarily we're producing local for local, so we have U.S. facilities.
Speaker Change: Producing products for U.S. sales, and then also in China. We're producing for China production to the extent that we have any sort of tariff impact. We have mitigation plans underway. And one of those, as Mary mentioned, is pricing.
John: but we feel confident we can mitigate any tariff impact on what we see right now. Of course, it's a very dynamic situation, but what we see right now is that tariff impact will be minimal.
John: Thank you. Got it. Okay. No, that's that's very helpful. And then just as the follow up question, you know, on the strategic review of the inspect business, I guess, can you give us a little bit more color on the update or progress there? And also for the potential for that review to maybe be broadened, it looks like you're you may be maybe taking this toward the end of the year. I think Mary said in your in your commentary seems like a bit longer than normal to kind of think about a strategic review. So maybe you can
give us an update on that as well.
John: Okay, didn't intend to imply that. Let me address kind of an order. The process is progressing well. We are in a process. I can say that we have had quite a bit of interest.
John: being very deliberate and thoughtful in working through that. So, you know, we're kind of in the point as those discussions are live to really not being able to give you more color than that when I say before the end of the year.
John: Is that a long time? It probably does seem like a long time, but we're moving as expeditiously and softly as we can and I hope to have more news as soon as it's appropriate.
Got it. Fair enough. Thanks very much for the collar.
and John Nypaver. Thank you. Thank you.
Speaker Change: The next question comes from John Tanwanto from CJS Securities. John, your line is open. Please go ahead. Good morning. Thank you for taking my question. We'll be back in the next quarter. And also, David, to you for the appointment of the CEO position.
Um...
John: If you could, I was wondering if you could talk about your strategic and operational priorities, especially in a ballpoint environment compared to your predecessors and how might be different.
Speaker Change: Yeah, thanks, John . And first, as I mentioned, really excited to be here. I've known Ingevity for a long time, and I've spent my career in specialty materials.
Speaker Change: from a strategic and operational focus. I think a lot of what the momentum that Luis says our interim CEO brought is something we definitely want to continue just in terms of that focus on discipline execution.
getting optimized performance from our businesses.
Speaker Change: Mary talked about the ongoing process we have around industrial specialties, so we need to really focus on executing and really optimizing business performance. The priorities also remain the same, which are to continue reducing our leverage.
and getting to the point where we have.
with some optionality with our business.
Speaker Change: You know, I think about it in terms of right now we've got a portfolio that's in transition.
Speaker Change: Optimize that business performance and then figure out what is the kind of cohesion of our portfolio where do we have the right to? Thank you.
Speaker Change: to operate businesses and think about then, think about where we might grow into, but I think for this first period it's really focused on execution, paying down debt and being a little bit more front-footed and having some more optionality with the business.
[inaudible]
Speaker Change: Great, thank you. Mary, if you could touch on the casual for the year, what let you keep the forecast with a little bit more, I guess, from the earnings, especially if the auto comes
Speaker Change: So we, you know, continue to execute well on working capital management.
and...
Frank Lee, Inge Sam.
Speaker Change: in a worsening environment, hopefully we don't get there, but if you're in an environment where sales, for example, are trending down in that lower EBITDA part of the guidance.
Speaker Change: We would typically actually throw off more free cash flow. You're not building as much inventory for growth. You're not building receivables for growth. So history demonstrates that.
Speaker Change: You know, in this scenario that we've articulated for you here, we're very comfortable affirming the free cash flow guide.
Speaker Change: Thank you. Thank you. And then, if I could speak one more, and you mentioned a TV slowdown, which is pretty apparent. I was just wondering how much does that impact your, your forecast internally versus, I guess, the 10% down on the industry? And, you know, furthermore, how does that impact the investment on action?
Thank you.
Speaker Change: Right, so I think your question was really on EVs, but let me just take the, you know, from from kind of setting.
Speaker Change: The Fundamentals First. We wanted to really anchor our guidance on...
Speaker Change: A widely accepted industry center, which was at Pesson P, so they reduced their forecast by about 10%.
and modeling that into 10% of North Americans.
Auto Production Action.
Speaker Change: and when you kind of model that through our results, that's how we get to that $15 to $20 million into our reduction in EBITDA. And we wanted to do that also because...
Speaker Change: It's a very uncertain environment, if it's less than, you know, the effect would be less and obviously if it's more the situation worsens then it also would correlate with that initial guidance.
Speaker Change: In terms of EVs, our investment with Nexion is really an exciting initiative to extend our expertise in carbon technology to EVs.
Speaker Change: Even though EVs are slowing down, they're obviously becoming an important part of the auto industry and so while we are pleased with the progress with Nexion, I think that any sort of...
Speaker Change: Slowdown in EVs. We're more excited about the adoption of this new type of technology that would represent a new growth.
Platform for us.
So I don't think the EV's slowdown would really impact.
Our enthusiasm for the future.
Speaker Change: Technology from Nexion. And maybe I'll just add on to that. Again, this is about, you know, one element of Nexion is about new battery technology, so it's not just EV cars.
Speaker Change: Technology. This is about us finding new applications for our carbon in in new battery technology and
Speaker Change: Hopefully, you know, we like to progress with Nexion, and if that technology is successful, again, remember EVs include hybrids and we're in hybrids.
Speaker Change: 2. So those are not, you know, on the decline. Hybrids continue to see good growth.
Speaker Change: So we view hybrid segment of DVs as positive, and we also view Nexion as potentially another doorway to new markets for us.
Great. Thank you.
[inaudible]
Speaker Change: The next question comes from Daniel Rizzo from Jeffries. Daniel, your line is open. Please come ahead.
Good morning, everyone. Thanks for taking my question.
Daniel Rizzo: You mentioned that maybe shifting to the filtration market if there is more weakness within auto. I was wondering if how big the filtration market is and if it's large enough to kind of handle the shift in volumes or if it's kind of more of a partial offset.
Daniel Rizzo: Yeah, I think that's been something that we've had in place for a while. It's a natural outlet for if any underutilized capacity. I let Mary maybe comment on just how much of an outlet we've used in the past.
I think during COVID, when production was down.
Daniel Rizzo: Significantly, that filtration was a significant pivot for us. And, again, clearly lower margin markets than auto, just about, you know, most things are. But that is a very sizable market and can soak up a lot of capacity if it's available.
Speaker Change: Will you sit lower margin? Can you quantify what you're talking about, really?
We have not quantified that in the past.
Speaker Change: But I think that if you look at the market for our activated carbon, as Mary mentioned, it's a big segment. We'll obviously prioritize the higher value components of it, but it's hard to find a comparable to the auto market that we have a very strong position.
Speaker Change: So, you know, obviously it will be something last but as Mary mentioned we haven't talked about the specific margin range.
Speaker Change: Okay, thanks for the clarification. And then you mentioned getting down to less than 2.8 times leveraged by the end of the year. I was wondering if there's what the long-term goal is or if that's changed it all in, I don't know, in recent times.
Speaker Change: Well, we've historically said two to two and a half times, and I think we're still in that, you know, still holding firm to that as a long-term target.
I think today's point.
Speaker Change: We believe, especially, you know, as kind of in the smaller caps, mid cap space that that kind of leverage seems to be where our owners would like to see us and does provide us that additional optionality that Dave mentioned. So we're headed clearly headed in the right direction.
and John Nypaver. Thank you. Thank you.
Thank you very much.
Thanks, Tina.
Speaker Change: The next question comes to Michael Sison from Wells Fargo. Michael Jeline is open. Please come ahead.
Speaker Change: Hi, this is Abigail on the mic. Thanks for taking my question and congrats, David. So looking at APS, you mentioned increased competition in China. Are you expecting that to remain a headwind going forward? And do you think you'll be able to recoup any of the pricing you've had to concede long term?
Yeah, thanks, Abigail. It is a competitive, um...
Environment, especially in China, as we mentioned.
Speaker Change: But I think on the other side of it we have a new leader in charge of the business, Michael. We're really excited to bring him aboard.
and he's brought not only experience but also...
Speaker Change: We are optimizing our commercial approach and so I think we definitely have advantages, we have technologies that have differentiation.
Speaker Change: So we're encouraged, but it is a competitive environment, and so it's one of those things where we expect to continue maintaining our positions, growing them in certain situations.
Speaker Change: There's obviously an industrial component, an auto component, and sort of a consumer component.
Speaker Change: and so I think it's going to be a kind of a slog but I think we definitely have technology with differentiation, a new leader in place.
Speaker Change: and so we're encouraged by our progress there. And so again we'll have to see how it goes in the future but encouraged by what we've seen so far and excited to have Michael aboard.
Speaker Change: Okay, got it. And then, as I fall up, in terms of raw materials, you mentioned that your rods in performance chemicals are either source locally or exempt from tariffs. Is that true for your other two segments?
Speaker Change: Yeah, from a tariff perspective and a supply chain perspective, we're really not very exposed to tariffs at this time. We think the impact is very minimal and so everything that we can source locally, we have. That's already been something we've had in place for a while. So from a supply chain perspective, really no concerns.
Okay, got it, thanks.
Speaker Change: I have no further questions, so I'll hand it back to John Nypaver for some closing comments.
John Nypaver: That concludes our call. Thank you for your interest in Ingevity and we'll talk with you again next quarter.
Speaker Change: This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.