Welcome to the Ingevity Fourth Quarter Earnings Conference Call. At this time all participants are in a listen only mode. Later we will conduct a question and answer session. [Operator Instructions]. Also as a reminder today's teleconference is being recorded. At this time I will turn the conference over to your host, Director of Investor Relations, Mr. Dan Gallagher. Please go ahead, sir.

Thank you, Tony. Good morning, everyone. Welcome to Ingevity's fourth quarter earnings conference call. Earlier this morning we posted a presentation on the investor section of our website that we will be speaking to on today's call. If you haven't already done so, I would encourage you to download this file in order to follow along on the call. You can find it by visiting IR.Ingevity.com under Events and Presentations. On slide number two of that deck you'll see our disclaimer that today's earnings call may contain forward-looking statements. Relevant factors that could cause actual results to differ materially from these forward-looking statements are contained in our earnings release and our SEC filings, including the Form 10 and our most recent Form 10-Q. Ingevity undertakes no obligation to publicly release any revision to the projections and forward-looking statements made during this call or to update them to reflect the events or circumstances occurring after the date of this call. Please note the company has made certain revisions to previously issued financial statements. A description of these revisions can be found in our news release issued yesterday afternoon. Throughout this call we may refer to non-GAAP financial measures which are intended to supplement, not substitute for, comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measures are included in our earnings release and can be found on the investor relations section of our website. For purposes of this earnings call, 2016 non-GAAP financial measures are compared to the equivalent 2015 pro forma non-GAAP measures. Our agenda is on slide three. With me today are Michael Wilson, President and CEO and John Fortson, Executive Vice President and CFO. As you can see by our agenda on slide three, Michael will provide some commentary on the highlights in the quarter and full year, review performance for our two segments and make some remarks about our outlook going forward. John will discuss our current financial status, our guidance for 2017 and our new share repurchase program. Then Michael will make some brief closing remarks before we open up the lines for Q&A. Joining Michael and John during the Q&A portion of the call will be Mike Smith, President of Performance Chemicals and Ed Woodcock, President of Performance Materials. With that, I'll turn the call over to our President and CEO, Michael Wilson.

Thank you, Dan. Good morning, everyone. Thank you for joining us this morning and for your continued interest in Ingevity. If you turn to slide number four, you'll note some highlights for the quarter. Ingevity's revenues overall were in line with our expectations and were essentially level with the prior year's quarter. As you may know, the fourth quarter is typically a slower period in our business. This is predominantly due to the seasonality of the U.S. paving market which impacts performance chemicals sales. In addition, sales of our automotive carbon products are mostly slower in the fourth quarter due to the U.S. auto production holidays. So in what is typically a seasonally slower quarter and despite sales even with last year, we delivered adjusted EBITDA of $36 million which was up $6 million versus the prior year quarter and reflects an 18% increase. Our fourth quarter adjusted EBITDA margin of 17.1% was up 250 basis points from the prior year quarter margin of 14.6%. These strong increases were driven by improved product mix, lower raw material and energy costs and strong cost reduction in productivity. On slide five, you will find the results for the full year. And looking back at 2016, it really was a remarkable year. We successfully executed the spin off from WestRock to become an independent publicly traded company. We drove strong growth in performance materials and restructured our performance chemicals segment in face of headwinds. And we achieved our 12-month companywide cost reduction target, decreasing costs by more than $30 million in the year or the equivalent of just over 3% of sales. Overall, we delivered solid financial results, increasing both our adjusted EBITDA and adjusted EBITDA margins. While our revenues were down over 5%, we increased adjusted EBITDA by $12 million or 6%,…

Thank you, Michael. Good morning, everyone. First, I'll provide additional color on our financial performance in the quarter and over the entire fiscal year. Second, I'll review our cash generation and capital structure. I'll discuss it provide some additional details on our guidance for 2017 and touch on our share repurchase authorization. Turning to slide number 10, as Michael mentioned, performance in the fourth quarter as well as for the full year was in line with our expectations. Before we go further, I would like to expand a bit on one of Dan's comments at the outset of the call. During the course of the year, we identified a number of accounting issues related to previously filed annual and interim combined financial statements. The issues were the result of a legacy pre-spend accounting conclusions. None of these issues individually or in the aggregate were material. However, given this is our first audit, we're taking this opportunity to revise our financials because we think it is the right thing to do. Explanations of these revisions can be found in the tables in our earnings release and further detail will provided in the 10-K. When looking at 2015, revenue for the year was revised down by $9.4 million and pro forma adjusted EBITDA revised down by $1.6 million. That explains the differences in the 2015 numbers on this page from what you have seen previously. While not evident on this page, but in the interest of everyone understanding our historical numbers, additionally, one of the effects of this revision is that adjusted EBITDA for the first quarter of 2016 increased by approximately $3 million as a result of reversing a charge related to intercompany profit. This charge was disclosed in our first quarter 10-Q and is now charged in the appropriate historical…

Thanks, John. In summary, as we kick off 2017, our focus is on implementing our growth strategies while operating efficiently and holding the line on costs. We expect to turn in a strong performance within our double digit adjusted EBITDA growth. Long term, our outlook remains very positive. The attractiveness of our markets, the soundness of our strategy and our ability to operate superbly will help us drive profitable growth and create value for our shareholders. We continue to believe very strongly in the potential for our company. We hope you share our enthusiasm for Ingevity. At this point, Operator, we'll open up the call to questions.

[Operator Instructions]. Our first question will come from Chris Kapsch with Aegis Capital. Please go ahead.

I had a couple questions, first surrounding your guidance for 2017. You talked about some build rate expectations in different regions and globally for autos. I'm just curious about the sensitivity to North America. It looks like you're forecasting flat sales in NAFTA, is that correct? And then also do you have, can you peel that back, do you have an expectation for light trucks and SUVs versus passengers cars within that expectation as you built to your 2017 guidance?

Yes Chris, this is Michael Wilson and you're correct in terms of the North American market. We see an expectation for flat automobile sales. I think in terms of the mix between larger and smaller vehicles or trucks and SUVs versus autos, I don't see anything at this point in time that's going to change the current dynamics that we've seen that have favored the larger vehicles. I think what could impact that is for some reason there were a spike in gasoline prices, but we certainly don't see that as we look at the futures market.

I see. And then following up in the PM segment, your comments about the new standards, both China 6 and then Europe 6c, do I understand this correctly that the transition associated with both of those new regs will require automakers to shift towards pelletized versus granular activated carbon to address those new emissions standards? And if that's the case in Europe, you said that the content per vehicle, given it's not as stringent as China 6, but you're still going to presumably see more content per vehicle. Any order of magnitude on what that lift would be? Is it closer to 3 to 5 times versus 8 to 10 times, as would be the case in China?

Yes. So you're right in that it does vary for China versus Europe, but I think generally you've got it framed right. But let me let Ed Woodcock give you some specifics.

Yes Chris, Europe has a much smaller vehicle base in general as well. But on a per vehicle content, you're getting maybe a 2x increase on a smaller control level in Europe. So Europe is only controlling parking emissions, whereas in China you're requiring or the control will be around refueling emissions plus multi day parking emissions plus running losses, so the canister differential between China and Europe is much greater, but incremental lift in Europe with a much larger incremental lift in China.

And I think in particular for China you'll be moving from the granular to the pelleted product which again is a more advanced technology, higher value content.

Correct and in Europe you'll go from a 100% granular market to a probably a mix of more heavily weighted towards pellets, but still some use of granular carbons.

Okay, that's helpful. And then finally you mentioned that it sounds like your new CTO contracts have been reset, so that's sort of baked into your 2017 expectations. Now in the past you haven't been willing to disclose specifically what the anticipated savings might be, but I'm just curious order of magnitude, if you look at the PC segment and you're still talking about 18% to 20% EBITDA margins, sort of in the 2018, 2019 timeframe, relative to where margins are exiting 2016, how much of the CTO benefit or how much of the bridge towards that 18% to 20% target does the new CTO reset influence?

Chris, you're right in that we've not been willing to quantify in dollar terms what the savings is. I would just say that they are significant, as we've talked about and they will be more weighted to the second half of the year. I would further add that we've really set the table not only for 2017, but also for our cost in 2018 which will be further advantaged. One of the issues we have today in terms of why you're not going to see it immediately reflected in the margins is that we talked about the fact we're still anticipating pricing pressure across our performance chemicals portfolio. So really the CTO savings that we're going to see in 2017 are simply offsetting a portion of that expected price deterioration. And if I could just make a comment or two about that, we saw prices falling fairly precipitously throughout the course of 2016. What we anticipate in 2017 is that we're going to see the full annualization of those price decreases. So that's what's driving a lot of the price decrease. Now in terms of the prospects going forward, we do still see a market where there's a lot of price pressure. If there's a positive to be seen, it's the stabilization in volumes that we talked about and we've begun to see across a couple of segments in the fourth quarter. And I think volume improvement, demand stability is a precursor ultimately to being able to get back to the situation where we have price leverage. It's just that given the precipitous decline that we've seen over the last 18 months and really our first 18 months responsible for this business, we're just being perhaps overly but certainly cautious about the outlook until we see a couple of quarters of solid positive trends.

That's very helpful, thanks for the color. Just as a quick follow up to that last comment, Michael, the stabilization of the TOFA intermediate in this most recent quarter, is that more a function of some of the alternatives to TOFA like maybe oilseed or some petrochem derived alternative being higher in cost? Or is it a function more of the maybe excess TOFA supply starting to abate? Thank you.

I would attribute it to two things. I think one is that you're saying perhaps the beginning of demand recovery on the oilfield side. Clearly rig counts have gone up and again we have seen a uptick in demand into our oilfield segment which is a big consumer of TOFA. That's very positive. The question right now, is that simply restocking of the supply chain or is it something that's going to be sustainable? And we're just not convinced yet. We hope that it turns out to be that way. But I think we have to wait and see. On the other hand, we have seen some increases in prices in some of the competing vegetable-based oils. But again, those are tied somewhat to petroleum prices and we need to see how they trend for a longer period of time.

Our next question in queue will come from Daniel Rizzo with Jefferies. Please go ahead.

With the new CTO contracts, this year or after they've been renegotiated, are there any price triggers or past due pricing at all this time around? Or is it similar to what it's been in the past?

Dan, are you talking about in terms of contracts with our customers or in terms of the supply?

The supply.

We have a portfolio of different contracts. I think the vast majority of these are set based upon a set price that aren't tied to any sort of index or other energy sources. Mike, I don't know if you have any additional perspective on that?

No, that's correct. In our case, they are just market based negotiated contracts.

So in other words, if energy prices were to go down, we don't have to [Technical Difficulty]. We won't see that. Or if energy prices go up, we're not going to experience an increase associated with that.

Okay. And then you mentioned successfully completing the cost reduction program in 2016. Is there another one in place? Or is it more just productivity gains, volume gains at this point or is there something more you can do?

Well we're always going to have a focus on keeping costs in line. I think we'll continue to focus on the SG&A line. We've had some restructuring that's been previously announced early in the first quarter, but I think beyond that at this point it's really holding the line on costs more so than implementing another significant cost reduction program.

Okay. And then finally with the announcement of the share repurchase plan, I know you said you still have growth initiatives, but are you signaling a change in priorities for free cash flow or you just have that this year for offsetting dilution, really?

Absolutely not. No change in priorities. This is really just for offsetting dilution from equity awards in our shares.

Our next question in queue will come from Jon Tanwanteng with CJS Securities. Please go ahead.

I know it's still a bit early, but with China's regulations now in the books and the Euro 6c opportunity out there and given the relatively fixed cost in your carbon segment, are you expecting to see meaningful growth or earnings acceleration in 2018, all else equal?

I think it really depends upon how quickly we begin to see a volume uptick from the China implementation. So the whole thing resides around whether or not some of the major metropolitan areas decide to go early, ahead of the national regulation and we just don't have clarity on that right now. We believe there is a good chance that certainly by the second half of 2018 and into 2019 we'll start to see that volume pick up. But that's not definite at this point in time.

Okay, that's helpful. And then just switching gears to the asphalt segment, what is the expected growth in that business within your outlook for 2017? First of all, is it in line with your historical growth? And two, how meaningfully could that improve in either 2017 or even 2018, if we do get accelerated infrastructure spending from the administration?

Without getting too granular, I would say that the growth in 2017 would probably be a bit below what we have seen historically on a CAGR basis over the last three years and that's predominantly because our outlook for China is flat in the second year of their five-year plan. I would expect that growth rate would tick up as we get into 2018, 2019.

Okay, got it. And then on the oilfield business, any more detail on how that's actually shaping up heading into Q1, rig count increasing almost daily? Is that the best metric, number one, to look at? And number two, can the business recover or improve significantly even if oil prices actually don't move that much?

I think clearly demand for our products is correlated to some degree both with rig count as well as with oilfield production. Our business today is pretty much balanced 50-50 into drilling and production. One kind of plays to the other however. So if is that picks up, it clearly is a benefit. I think that overall we need some volume demand increases across the business, whether it's oilfield or in some of the other applications that we're growing, in order to see the margin improvement, because part of it is predicated on getting better throughput through our facilities which are currently underutilized and benefiting from that fixed cost absorption. So we do need higher volumes, but again as I pointed out, I think volume comes first and one you get volume, you get more supply-demand balance and then you have an opportunity to see some benefit on the pricing side.

Okay, great. And then just a quick question on the increasing capacity of Waynesboro. Does that JV remain at 70-30 with the investments you're making? Or how should we think about that going forward?

Yes, it remains 70-30.

Our next question in queue will come from James Sheehan with SunTrust Robinson Humphrey. Please go ahead.

Could you talk about your discussions with auto OEMs? And are you seeing any desire from their side for changing the Tier 3 compliant schedule in the U.S.?

The answer to the question is no. And Ed, I don't know if you want to provide some color?

Yes, their primary focus is around the mid term review of the CAFE standards and working through the Trump administration to get those relaxed. But no impact whatsoever have we heard or expect with the LEV III Tier 3 implementation.

And could you talk about what your maintenance and outage costs were in each segment in the fourth quarter? And what was your outlook for those going forward in 2017?

Yes, Jim, I think the best way to characterize that, as we said at the end of our second quarter call that we thought that outages in the second half of 2016 would be a $10 million to $15 million headwind to earnings. We ended up at the lower end of that range, so let's call it a $10 million impact and I would say if you looked at the split between Q3 and Q4, it was probably 60% Q4, 40% Q3. In terms of 2017 outage costs, I think again they'll weighted to the back half of the year, maybe a little bit less so. We're looking at moving one of our chemical plant outages into the second quarter. And I would say outage costs overall might be less by sort of low single digit millions of dollars, simply because we have one less significant outage at our carbon plants this year than we had in 2016.

Great. And you talk about your CapEx outlook for 2017. Why is CapEx going to be up relative to 2016?

Mainly because we had a couple projects that were originally scheduled in 2016 and some of the spending got pushed to 2017. So I think John talked about it in his comments. But our 2016 spending ended up significantly below our outlook and so we just had a little bit of push into 2017. Two major projects that we have in 2017 from a growth standpoint are the expansion of the Waynesboro facility on the honeycomb scrubbers and then we have another project at our Wujiang facility near Shanghai in China, that is targeting increased capacity there ahead of the Chinese adoption of the new regs.

Our next question in queue will come from Mike Sison with KeyBanc. Please go ahead.

Hey, guys, nice end of the year. In terms of performance chemicals given the pricing pressure in the first half, when you think about earnings flow through, earnings declines, should it be down in the first half? And then given the CTO contracts, should it recover in the second half?

Yes, Mike, this is Mike. I think without giving specific guidance for segment, what I would say is you have the trend right in that because of the higher CTO savings in the second half of the year and I would say also my expectation would be market conditions hopefully to gradually improve as we go throughout the course of the year, I think that we would see stronger performance in the second half than the first half. I would only caveat that again by reminding you that our performance chemicals business is very seasonal to Q2 and Q3 because of the asphalt business which generates the majority of its revenues in those two quarters due to the North American paving season.

Okay. And then post-2017, it sounds to me it's going to be difficult to get much earnings growth in chemicals in 2017. And you still think you can get to 18% to 20% longer term in terms of EBITDA margins. What do you think needs to happen to see that business start to grow over the next couple of years?

I think first of all we restructured the cost base of that business. So as business conditions improve, we're going to leverage that new lower cost base to get greater profitability. So that's going to happen. I think the CTO savings in 2017 are going to help. As I said, the table's already set for 2018. That's going to provide a further benefit. Beyond that, what we need is to see a recovery in volume. I think that's going to happen over time. I can't predict the timing in our core markets. Hopefully that's going to happen in oilfield, it's going to happen in a number of our industrial specialties applications and our pavement business will continue to grow which is one of our higher profitability segments and it probably has the highest growth, inherent growth rate within performance chemicals. So all of that bodes well from a mix standpoint. And then we just need that additional volume. Once volume occurs and we get supply-demand balance, then I think we can get back to some pricing leverage and that's where you really get the drop through.

Right, okay. And then shifting to performance materials, when I think about your short term outlook, you still have the good growth potential in honeycomb and the global auto production's a little bit modest and it seems to be very similar to 2016 to some degree. Why wouldn't performance materials grow earnings as fast in 2017 as he did in 2016?

That's a question I ask Ed Woodcock everyday.

Ed, I guess that's your question.

Yes, Mike, I think it comes to the implementation of the Tier 3 LEV III in the back half of the year. We have pretty good clarity to the first half because that's what we would expect to roll through from the second half of 2016. Relative to the adoption rate in the second half of 2017, we've taken an estimate around it, but we've taken a conservative estimate on what that's going to be. So as we get closer to it, we'll have a better understanding.

All right, okay. And last question, for China 6 and Euro 6c, do you need to add more capacity? And if you do, I guess you'd probably add it in China if that's the case?

Recall, Mike, that we just completed the facility in Zhuhai, so that's $100 million investment in there and it's really there to serve this demand that we knew was coming for some period of time. So no major capacity addition there. I did mention a capital project that we hope to get approval for here in the first quarter for expanding -- we have a second facility already near Shanghai that makes product for the existing China market. We're going to need to do an expansion of that, but it's much less capital intensive than what we did in Zhuhai. But we're in a pretty good position from the standpoint of capacity. As we've said before, there's been a lot of investment made over the last few years. So beyond the capacity addition in the Waynesboro, Georgia joint venture and in the Suzhou facility in China, not big numbers for growth capital. Those are two relatively low capital intensity projects.

[Operator Instructions]. Our next question in queue will come from Ian Zaffino with Oppenheimer. Please go ahead.

I guess I'm still a bit confused on the pricing on the industrial specialty side. If you look at it on a quarter to quarter basis, are you still seeing a decline in pricing? Or are we just more focused on the annualization of previous declines? Thanks.

I would say the majority of it is the annualization of previous declines. I think in terms of pricing pressure, I think we're getting -- and even if we're not at or near the bottom of where we're going, but there is the risk for continued deterioration in pricing. I would say perhaps more so on the rosin side of the business than now maybe the TOFA side, where it was TOFA before. But we're still under some pricing pressure, Ian and we've got to see our way clear of this.

And then another question would be on the highway spend. Can you give us an idea of how to think of the drivers? I know you have mentioned state being a bigger driver recently. But if we do get some type of federal infrastructure build, maybe help us understand what the bigger driver might be? Federal versus state? Or how much is state contributing to the mix? Or [indiscernible] a mix where federal is going to come up behind it? Maybe just give us a little color there, that'd be helpful.

Well it's hard to really quantify that, because I think we're still in some level of uncertainty. I think given the state ballot measures that I mentioned in the past, we're pretty confident that states and municipalities will be willing to spend more on infrastructure and hopefully that means paving roads. I think we were, like a lot of people, were encouraged by some of the rhetoric at the federal level regarding increased infrastructure spending. It just seems that there's still uncertainty about exactly what's going to get past and what dollars are going to get spend. So it makes it hard to quantify. I think all of that said, the way we look at this is that what's predominantly driving the growth in our pavement business is the adoption of technology and the benefits that technology is bringing to building better roads at lower cost and with less environmental emissions. So I think we're relatively optimistic about our ability to grow that segment well ahead of rates of infrastructure spending. So we're not totally dependent upon it, it would just give us a tailwind if it were to occur.

Thank you. At this time I will turn the conference back over to our presenters for any closing comments.

Okay, well thank you, everyone, for your time and interest this morning. We remain very positive about the outlook for our business and we look forward to talking with you again next quarter. Have a great day.

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