Q3 2025 Ingevity Corp Earnings Call
Speaker #1: Hello and welcome to today's Ingevity Third Quarter 2020 Earnings Call and Webcast . My name is Bailey and I will be your moderator for today .
Speaker #1: All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end . If you would like to ask a question , please press star followed by one on your telephone keypad .
Speaker #1: I'd now like to pass the conference over to John Nypaver , so please go ahead when you're ready .
Speaker #2: Thank you . Bailey . Good morning and welcome to Ingevity Third quarter 2020 Earnings Call . Earlier this morning , we posted a presentation on our investor site that you can use to follow today's discussion .
Speaker #2: It can be found on IR Ingevity . Com under events and Presentations . Also throughout this call we may refer to non-GAAP Financial measures , which are intended to supplement , not substitute for comparable GAAP measures .
Speaker #2: For example , we are presenting the pending divestiture of our industrial Specialties business for the first time within discontinued operations in the appendix to our slides , we provide details that reconcile the total operations 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 .
Speaker #2: 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 .
Speaker #2: As further described in our earnings release , our agenda is on slide three . Our speakers today are David Lee , our CEO , and Mary Dean Hall , our CFO .
Speaker #2: Dave will provide introductory comments . Mary will follow with a review of our consolidated financial performance and the business segment results for the quarter .
Speaker #2: Dave will then provide closing comments and discuss 2025 guidance . With that , over to you , Dave . Thanks , John , and good morning , everyone .
Speaker #2: It was a highly productive quarter of strong execution for Ingevity . First , we achieved an important milestone in our strategic portfolio review with the announcement of the sale of our industrial specialties business .
Speaker #2: For $110 million . We expect this transaction to close in early 2026 , and will likely use the majority of the proceeds towards further debt reduction .
Speaker #2: Second , we were pleased with our business segment results , performance , materials delivered another strong quarter within a dynamic global auto environment .
Speaker #2: Going forward , we are encouraged by the adoption of hybrids and fuel efficient ice platforms , which should drive demand for advanced Ingevity solutions and content growth .
Speaker #2: Technologies also had a great quarter highlighted by record sales for our pavement business in North America . Finally , Apte delivered strong margins as the team prioritized operational improvements against the backdrop of continued weak and market demand .
Speaker #2: Overall , these contributions reflect our team's disciplined execution as well as strategic repositioning actions , which drove best in class EBITDA margins of 33% , reflecting our sixth consecutive quarter of year over year margin expansion .
Speaker #2: Strong cash flow generation and disciplined capital allocation enabled us to reduce debt , achieve our leverage target ahead of plan and return capital to shareholders through share repurchases .
Speaker #2: And third , I'm very excited to announce we hired Ruth Castillo to lead our performance materials business . Ruth is a strategic and experienced leader with a deep understanding of how to navigate complex businesses and unlock new growth opportunities .
Speaker #2: I look forward to her leadership and guiding performance materials into its next phase of profitable growth . Before I turn it over to Mary for more details on the financials , I'm pleased to share that we will host an investor update on December 8th .
Speaker #2: This will be a virtual event where we'll share the results of the strategic portfolio review and provide an assessment on what we believe the company will look like over the next two years .
Speaker #2: More details on how to register for the event will be forthcoming . And now I'll turn it over to Mary .
Speaker #3: Thanks , Dave , and good morning all . It's nice to have some good news to share in this unsettled economic environment . Our Q3 results reflected continued growth in adjusted EBITDA margins and free cash flow , despite pressure on the top line affirming the resilience of our businesses and the successful execution of our repositioning actions and performance chemicals .
Speaker #3: As previously noted , with the announced sale of industrial specialties , we're now reporting the results of that business as discontinued operations with the sale expected to close by early 2026 .
Speaker #3: Given our close proximity to year end and that full year guidance is based on total company performance , I'll focus my comments on total company results so that comparison prior periods are apples to apples .
Speaker #3: I'll provide more color on continuing and discontinued operations when we discuss the performance chemicals results . Please refer to slide five . Total company sales of $362 million in Q3 were down about 4% , as increased sales in performance , materials and road technologies were more than offset by decreases in industrial specialties and APT .
Speaker #3: Gross margin improved over 600 basis points, reflecting significantly lower raw material costs, primarily in industrial specialties, and the successful execution of our repositioning actions.
Speaker #3: As a result of higher variable compensation expense due primarily to improved business results, adjusted earnings improved significantly, up almost 500 basis points to $56.3 million, driving adjusted EBITDA margin to 33.5%.
Speaker #3: Please turn to slide six . As a result of strong earnings and disciplined capital management . Our free cash flow of $118 million enabled us to repurchase $25 million of shares in the quarter and accelerate deleveraging .
Speaker #3: We ended the quarter with net leverage of 2.7 times , already , beating our previous year end target of 2.8 times . We now expect net leverage to be approximately 2.6 times by year end .
Speaker #3: This does not include the benefit of any proceeds from the sale of industrial specialties , which is expected to close by early 2026 .
Speaker #3: As I mentioned earlier . Turning to slide seven , performance material sales increased 3% , primarily due to volume growth , reflecting improved global auto production .
Speaker #3: Segment EBITDA and EBITDA margin were down a bit as the benefit from increased volumes and price was more than offset by increased variable compensation expense and a negative impact from foreign exchange .
Speaker #3: Q4 is looking solid , but we do expect Q4 to be a bit softer coming off of a strong Q2 and Q3 . So on a full year basis , we expect PM revenue to be flat to slightly down year over year with EBITDA margins over 50% .
Speaker #3: Our results demonstrate the resilience of this business in the face of unprecedented uncertainty caused by the dynamic tariff environment . Please turn to slide eight for Aptt results .
Speaker #3: Sales in Aptt declined year over year for many of the same reasons we discussed last quarter . The indirect impact of tariffs continues to weigh on already weak end market demand , especially in footwear and apparel , delaying the upturn .
Speaker #3: We otherwise expected to see . In addition , competitive dynamics in China are continuing to impact sales in the pain protective film markets .
Speaker #3: The team did a great job holding on to price , where possible , and managing costs , and posted an EBITDA margin of 26% for the quarter , which also reflected a tailwind from foreign exchange .
Speaker #3: Near-term , we see no indications that the current market conditions or competitive dynamics will improve . We now expect full year revenue for Aptt to be down by mid-teens on a percentage basis , with full year EBITDA margin of 15 to 20% , down from their more typical 20% area margins due to the extended plant outage in Q2 .
Speaker #3: On slide nine , performance Chemicals , the left side prevents a presents a combined view of Performance Chemicals results , including continuing operations and discontinued operations .
Speaker #3: As I mentioned earlier , with the announced sale of industrial specialties , accounting rules require that we separate results of the product lines being divested into discontinued operations .
Speaker #3: However , because the sale is not yet completed and our guidance is for full company , results , we're showing the Q3 results on a combined basis .
Speaker #3: As you can see , combined sales were down almost 5% due to industrial specialties and our repositioning actions in that business road technologies posted sales up 5% as the pavement business delivered a record Q3 in North America , which is our largest and most profitable region .
Speaker #3: Road technologies . As part of continuing operations , includes the lignin based dispersions business , previously included in industrial specialties combined segment EBITDA and EBITDA margins improved significantly year over year due to lower raw material costs and industrial specialties , and the successful execution of repositioning actions on a continuing operations basis .
Speaker #3: Performance chemicals EBITDA margins were down slightly , primarily as a result of pricing decisions made in the road markings business to maintain volumes .
Speaker #3: Please refer to slide 27 in the appendix of the slide deck for a reconciliation of Performance Chemicals segment EBITDA on a continuing operations basis to the combined segment EBITDA, inclusive of discontinued operations.
Speaker #3: On the right hand side of slide nine , we've added some detail regarding the impact of the divestiture on the combined results . There's noise in the Q3 numbers , so we believe it's most useful to look at the impact on a full year basis .
Speaker #3: As you estimated can see , we expect the divestiture to contribute approximately $130 million in sales for the full year , with an EBITDA margin of approximately 6% , inclusive of indirect costs .
Speaker #3: Please note that these indirect costs related to the divestiture , often referred to as stranded costs , are included in continuing operations for reporting purposes .
Speaker #3: On a full year basis , we estimate these indirect costs will be approximately $15 million , which we expect to eliminate by the end of 2026 .
Speaker #3: In addition , the divestiture is expected to contribute approximately $40 million to free cash flow on a full year basis , primarily due to lower working capital .
Speaker #3: In summary , we continue to focus on delivering results in the very challenging environment and are proud to report our sixth consecutive quarter of year over year adjusted EBITDA margin expansion .
Speaker #3: In addition , with our strong free cash flow , we have strengthened the balance sheet and resumed share repurchases . I'll now turn the call back over to you , Dave , for an update on guidance .
Speaker #2: Thanks , Mary . Please turn to slide ten . We are very pleased with our third quarter results . And are on track for a strong finish to the year .
Speaker #2: Our results reflect sustained execution . The durability of our business model and our leadership in the industries we serve . We are raising full year free cash flow guidance and now expect net leverage to be around 2.6 times by year end .
Speaker #2: We will continue to be disciplined in how we allocate capital and look forward to closing the sale of our industrial specialties business soon .
Speaker #2: Lastly , given the ongoing tariff uncertainty and slower industrial demand primarily impacting APT , we're adjusting our full year outlook to narrow the top end of our sales and EBITDA range .
Speaker #2: In closing , we look forward to hosting everyone virtually on December 8th . For our investor update , when we will provide the results of our strategic portfolio review and our expectations for the future .
Speaker #2: With that , I'll turn it over for questions .
Speaker #1: Thank you . If you would like to ask a question , please press star followed by one on your telephone keypad . If for any reason you would like to remove that question , please press star followed by two .
Speaker #1: Once again to ask a question , please press star followed by one . Our first question today comes from the line of John Tang from KGI securities .
Speaker #1: Please go ahead . Your line is now open .
Speaker #4: Hi . Good morning . Thank you for taking my questions and nice job in the quarter . My first question is just regarding the full year outlook .
Speaker #4: I noticed that you're taking down the top end for apt , which makes sense . I was wondering if you could actually speak to the performance materials segment and to the , you know , publicized aluminum plant fires in North America .
Speaker #4: The chip shortages that are going on in China and just how that's impacting your outlook there, and what's implied in the guidance.
Speaker #4: And if you've accounted for that .
Speaker #2: Yeah . Thanks , John . Yeah . With respect to those challenges you mentioned , obviously if you zoom out , it's been a pretty dynamic year for the industry .
Speaker #2: I think it actually speaks to the resilience of the auto industry in general . I mean , we've been through tariffs some macro uncertainty .
Speaker #2: And as you mentioned , some more recent supply chain challenges . And our our results and outlook , would reflect any impact from those .
Speaker #2: But I think overall , if you look at the results we've delivered for performance materials , it demonstrates also the durability of our business .
Speaker #2: The continued leadership we have in that space . And I think quarter over quarter , we've continued to deliver strong results . But to answer your question on those two , on those two , supply chain challenges , our results and outlook do reflect any impact to those going forward .
Speaker #4: Got it . That's helpful . Thank you . And then just on the the discontinued ops , you mentioned the or I guess you gave metrics for what you expect from the year in the in the Inspec business .
Speaker #4: Could you kind of tell us what's implied in the Q4 just because we don't have the the first half results in there , then you broke out the Q3 in terms of Ebit contribution .
Speaker #2: From this is John , you know , we we do show full year for that discontinued ops . It should be easy for you to get to that .
Speaker #2: I would think . But we can talk offline if you need help . on that . Yeah . John , I kind of just in terms of sizing the business on an annualized basis , think of it as about a kind of mid-single digit EBITDA business .
Speaker #2: So we've reported three quarters of it . So kind of extrapolating that out to the fourth quarter , I think would make sense .
Speaker #4: Okay . Great . Thanks .
Speaker #1: Thank you . Our next question today comes from the line of Daniel Rizzo from Jefferies . Please go ahead . Your line is now open .
Speaker #5: Hey , guys . You mentioned working capital and free cash flow . I was just wondering how we should think about working capital post the divestiture as maybe as a percent of sales or just how you plan to to kind of manage that .
Speaker #3: So . So you're really thinking , looking forward into 2026 , Dan .
Speaker #5: Right . Well , just I mean , not not for just 2026 , but just how it changes at all . Once the once the once the business is divested .
Speaker #6: Yeah . Hey , Dan , this is this is Phil . I think if you look at our balance sheet , which is included in the press release schedules , we broke out the impact of the discontinued ops on the balance sheet and pulled them out of separate line items .
Speaker #6: So it will give you a really good , clear indication for what we're thinking . Working capital looks like for the business going forward .
Speaker #5: Okay . And then you mentioned that I think that the EBITDA is going to be about 2.7 times at the end of the year , and then you get 110 million , roughly from from the sale .
Speaker #5: I mean , and that's going to be used towards debt . So I guess my my question is , what is the net debt to EBITDA target ?
Speaker #5: Because that seems like you would that would bring you relatively low .
Speaker #3: So so Dan , just just for clarity , we've finished the quarter at 2.7 times . And as a result of beating our year end target already , we're reducing our target for year end to 2.6 .
Speaker #2: Okay . And then in terms of use of proceeds , Dan , we mentioned or I mentioned in my comments , we'd likely use the majority of proceeds when received to to further pay down debt .
Speaker #2: I want to hold off a little bit because we'll also talk more about capital allocation as one of the major topics on December 8th .
Speaker #2: But obviously , if you look at primary use of the proceeds as debt reduction , you can you can do that trajectory down .
Speaker #2: But we're really pleased with our achievements so far ahead of plan . We had targeted 2.8 or below by end of year , so we finished the quarter .
Speaker #2: As Mary mentioned , at 2.7 . And we think we've got a glide path to 2.6 without any proceeds . Use of proceeds to pay down further debt .
Speaker #5: Thank you very much .
Speaker #1: Thank you . As a reminder , if you would like to ask a question on today's call , please press star followed by one on your telephone keypad .
Speaker #1: We have no additional questions waiting at this time , so I'd like to pass the call back over to John Nypaver for any closing remarks .
Speaker #2: Actually , Bailey , I believe someone is in the queue . If you wouldn't mind double checking .
Speaker #1: Oh , perfect . Yes , we will take our next question . Apologies from John McNulty from BMO Capital Markets . Please go ahead .
Speaker #7: Yeah . Good morning . Sorry about the last second question there . So I guess I just wanted to understand performance materials a little bit better for the full year sales to be kind of flat to slightly down .
Speaker #7: I mean , when we look at kind of the overall auto forecast out there , there roughly in line with that . But I assume normally you're getting some reasonable amount of price .
Speaker #7: So I guess is it is there some negative mix that we should be thinking about on the auto builds that may be contributing to this type of a result , or is pricing maybe more modest than it's been where maybe it's taken a little bit of a pause after the last few years , I guess .
Speaker #7: Can you help us to think about that ?
Speaker #2: Yeah . John . So as we mentioned earlier in the year , we've we've taken pricing as we , we typically do , I think there's , you know , when you look at the auto forecasts as we do as well , they're calling for sort of flattish to slightly down .
Speaker #2: That's similar to our PM business . But in terms of the overall mix of those vehicles , obviously we've had a lot of volatility .
Speaker #2: For example , for EVs throughout the year . So when you look at the overall trend for auto , automobiles may not reflect just ice .
Speaker #2: And hybrids . We think we have we have a very strong position in that market . Market continues to be healthy , actually still inventory levels are pretty low .
Speaker #2: And and the fleet remains pretty aged . So we're we're thinking that we're even not back to a healthy level of production . But given that , I think that's how sort of the the math would shake out for us , it's just not taking into account the portion that's EVs .
Speaker #2: But , Mary , what what else would you add ? Yeah .
Speaker #3: Maybe just another little point of clarity focusing on North American production , which , as you know , John , is where we're most profitable .
Speaker #3: While the forecasts have has improved again , actually , for the full year for North America in particular , it's still down . So it's the latest forecast information we have is that even North America is still down a couple of percent a year over year , albeit an improvement over the prior forecast .
Speaker #3: So I think that in combination with some of the noise that that we're also , as we mentioned , factoring in the fire at Ford chip issues , etc.
Speaker #3: , that are making noise in the supply chain system of automotive . We feel comfortable with our current guide .
Speaker #7: Got it . Okay . Fair enough . So it sounds like it's really a mixed thing more than anything else . And then I guess the other question is just any update on the next platform and that venture and how things may be going there ?
Speaker #2: Yeah . So as we mentioned with Nexium , that's a kind of a far out R&D type of initiative . We do expect their plan to be up and running in the next few months .
Speaker #2: As a reminder , that's not using our activated carbon for this first generation . But continues to be a strong partnership and an exciting space that that we look forward to participating in with them .
Speaker #7: Got it . Thanks very much for the color .
Speaker #2: Thanks .
Speaker #1: Thank you . As one final reminder , if you would like to ask a question on today's call , please press star followed by one on your telephone keypad .
Speaker #1: As we have no additional questions waiting at this time , I would now like to pass it back over to John Nypaver for any closing remarks .
Speaker #2: Thanks , Bailey . That concludes our call . Registration for the Strategic Portfolio update is now open on our investor website under events .
Speaker #2: We will also issue a press release with more details later today . If there are any questions , please feel free to reach out to me directly .
Speaker #2: My contact information can be found in the earnings release and slide deck . Thank you for your interest in Ingevity .