Good morning or good afternoon, and welcome to the Ingevity First Quarter 2024 Earnings Webcast. My name is Adam and I'll be your operator for today. [Operator Instructions] I'll now hand the call to John Nypaver to begin. So John, please go ahead when you're ready.

Thank you, Adam. Good morning and welcome to Ingevity's first quarter 2024 earnings call. Earlier this morning we posted a presentation on our Investor site that you can use to follow today's discussion. It can be found on ir.ingevity.com under Events and Presentations. Also, 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 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 3. Our speakers today are John Fortson, our President and CEO; and Mary Dean Hall, our CFO. Our business leads Ed Woodcock, President of Performance Materials; Rich White, President of Performance Chemicals; and Steve Hulme, President of Advanced Polymer Technologies are available for questions and comments. John will start us off with some highlights for the quarter. Mary will follow with a review of our consolidated financial performance and the business segment results for the first quarter. John will then provide closing comments and discuss 2024 guidance. With that, over to you John.

Thanks, John, and good morning, everyone. Turning to Slide 4. We had a good strong start to 2024. Performance Materials' revenue and EBITDA were both up strongly and the segment generated margins close to 54%, exceeding expectations and executing well. This performance is a result of a lot of hard work by the PM team. Volumes were up from a year ago and the business benefited from higher pricing, improved throughput and lower input costs. APT performed relatively well this quarter. While revenue and EBITDA were down versus a year ago, they are being measured against a tough comparable period. First quarter 2023 was the last quarter before the stocking began. Positively though, they have now posted 2 quarters of sequential volume improvements and this is hopefully a good sign of a gradual recovery in their end markets. Importantly, despite these lower volumes, they maintain strong margins in the quarter. Performance Chemicals is tracking in line with our expectations for our repositioning strategy. The first quarter is a seasonally light quarter before the paving season really kicks in and it is also being negatively impacted by the cost we are paying for crude tall oil. Our savings targets remain on track. The transition to reduce our reliance on CTO is moving forward as we completed the shutdown of our DeRidder site during the quarter, and we are increasingly using oleo-based products coming out of our CrossFit facility in existing end markets like pavement and lubricants. In a few moments, I'll review our 2024 guidance and provide some perspective on expectations for the rest of the year. But before that, let me turn it over to Mary for more details on the quarter's results.

Thanks, John, and good morning, all. Please turn to Slide 5. First quarter sales of $340.1 million were down 13% due primarily to our repositioning actions in Performance Chemicals, which included a plant closure and our exit from certain low-margin end markets. Also contributing to lower sales were continued weakness in China and certain industrial end markets that negatively impacted sales in our APT segment and industrial specialties product line, more than offsetting a 3% increase in Performance Materials sales. For the quarter, we had $64.8 million of restructuring charges and $26.5 million of CTO resale losses related to the Performance Chemicals repositioning. These charges led to a GAAP net loss of $56 million. We've excluded the impacts of the restructuring charges and the CTO resale losses in our non-GAAP disclosure and our discussion for the remainder of this presentation. A reconciliation of our non-GAAP measures to GAAP is in the appendix to this deck and also in our earnings release and Form 10-Q, which will be filed later this evening. Our adjusted gross profit of about $120 million declined 19% and our adjusted gross margin was down 260 basis points to 35.2% due primarily to the combination of lower sales in Performance Chemicals and APT and CTO spend that was significantly higher year-over-year on lower purchase volumes. Adjusted SG&A improved 6% year-over-year. For the quarter, we realized a total of approximately $20 million of savings related to the Performance Chemicals repositioning and the other corporate actions taken last year. Of the $20 million in savings, about $5 million is reflected in SG&A and about $15 million in COGS. We are on track to realize our target of $65 million to $75 million in annual savings. Our diluted adjusted EPS and adjusted EBITDA declined on lower earnings, but we still…

Thanks, Mary. Please turn to Slide 10. We reiterate our full year guidance of between $1.4 billion and $1.55 billion and adjusted EBITDA between $365 million and $390 million. Our first quarter results are encouraging. We expect the Performance Materials segment and the road technologies product line and our Performance Chemicals segment will both have very strong years. Auto production that includes our material will remain robust as hybrid production increases. The road paving season is off to a good start and our order book is strong. These high-margin, high-growth businesses will anchor our performance this year and are at the center of our strategy going forward. And industrial recovery will primarily benefit our Advanced Polymer Technology segment and sales into industrial specialties markets and Performance Chemicals. I agree with many of our chemical peers that the second half of the year should be better than the first half and that sequential signs of improvement are encouraging. However, many of our peers have yet to see significant enough demand recovery to call for a strong rebound and we are in this camp as well. It is still early in the year and it's an election year. We will see. We are cautiously optimistic about demand patterns and believe APT has upside opportunities to our outlook if we continue to see sequential demand improvement. Sales into the industrial specialties markets will remain challenged due to the high price of our CTO-derived products versus substitutes available in the market. By closing DeRidder, we have exited many of our low-margin markets, but we do have some residual exposure. We are making significant progress in sales of our oleo-based materials, but the broader markets weakness is not helping us accelerate those efforts. As we said last quarter, we will be very disciplined in cash…

[Operator Instructions] And our first question today comes from Vincent Anderson from Stifel.

Is it fair to infer that from the much smaller difference between your booked losses on CTO resale versus your cash losses on CTO resale that your costs are converging towards that resale price?

Not exactly yet, but as we mentioned on the call, I mean, we do expect to see our situation improve in the back half of the year. I mean, our estimated costs for Q2 are down slightly from where we were in Q1, but we do expect that, yes, we'll see similar in Q2, but we'll see more acceleration or more of that convergence in the back half of the year.

Sure. And I mean, I understand that a lot of that is contingent on volume actually pulling that cost to the P&L, but I assume that, that difference between...

And listen, Vincent, as I mentioned in my closing remarks, I mean, we will continue to assess our options with regards to CTO and how that works, right? I mean, we are as you know are pushing pretty hard on oleo-based chemistries. There's a reasonable likelihood that, that should be 10% of revenue for that business next year -- or this year, sorry. We're continuing to look at are there other ways for us to continue to service the markets that we're in with the different operational footprint. So all those things are on the table. But to get back to your question, I do think that crude tall oil is -- the pricing that we pay vis-a-vis what is sort of the secondary market or what have you, will continue to improve over the course of the year, particularly in the back half.

Sure. Okay. Fair enough. That's helpful. And then just quickly, could you give us maybe an update or details that we didn't get into before on that paving agreement in Brazil? Like is this that you've been specked in with a customer and they'll market it, but sales still depend on adoption...

You are getting around, aren't you there, Vincent?

Well, I mean, you brought it up.

Rich, I'm going to turn it over to you.

Hey Vincent, this is Rich White. Yes, we are progressing well with this customer that you have uncovered in Brazil. They have transitioned one of their sites totally over to our technology and we're happy with progression that is being seen associated there with.

I mean, we've got, obviously there's competitive information, Vincent, but what I will say is this is a very large opportunity with a very large company down there. It's very encouraging that they're looking at our technology predominantly because it brings a lot of, not only performance attributes, but also production advantages because you're doing this at warm versus high temperature mix. So that's a big opportunity and we will continue to work on it.

Great. And actually just a quick clarifying question on that one for when it shows up, is Brazil would be opposite season or is it more dependent on rain rather than temperature for them?

Yes, that's a great question, Vincent. It's more dependent on the rainy season. You can really pave all year in Brazil, but it depends on when the rainy season comes on their ability to pave the roads.

The next question comes from Daniel Rizzo from Jefferies.

Just first a clarification, did you indicate that and I hear right that industrial specialties should have a run rate of about a $100 million in sales per quarter for the year? Is that what was said or did I hear that wrong?

No, Dan. And I probably was battling a cold, so maybe a little hard to understand. With a little -- $101 million sales in the quarter. And what I said was about 2/3 of that is the run rate that you should expect going forward for sales for inspect that the remaining 1/3 is largely due to selling off finished goods inventory in the markets that we're exiting.

And that's completely done. That's falling off the inventory?

There's some nominal amount left, but most of it in Q1.

That was the big slug.

So -- and you indicated, I think you wanted to get to 10% sales from oleo-based products, but I think by the end of the year, I don't know if you can disclose this. Is that up like from like 2% now or where are we like right now?

Well, you have to be careful with it because some of it's product substitution versus sort of new market sales, right? So we are selling modest levels of oleo-based stuff. We've got a lot of testing going on, certification, et cetera, right? But when you kind of roll it all up across all the businesses, you get to a number that's not too far from that.

Okay. Okay. And then finally, just again coming back to the PM EBITDA margin of 54%, I realize you said that don't expect that every quarter, but I mean a high-40%s, low-50%s is now the norm because I thought I could be wrong here. Like a few years ago, low-40%s was kind of what we're hoping for and now we've obviously moved well beyond that.

Well, that's right.

You're right. We used to say low-to-mid 40%s and I think we said now we're at mid-to-upper 40%s. That is correct.

And we've always said, Dan, look, we will do everything in our power to maximize the profit of that business every quarter. This, you have to understand that it has some lumpiness to it based on when we take outages, when Chinese New Year comes and when they pre-buy, there's just a lot of moving parts. So you can't take one quarter's margin and extrapolate it across the year, good or bad, right? So we set ourselves a long-term target of being in the high-40%s and we'll do better than that when we can.

The next question comes from John McNulty from BMO Capital Markets.

So I guess first one, we heard from the EPA kind of a new PFAS kind of level going forward. And some of the solutions, at least early on look like from a water table perspective is going to be tied into activated carbon or carbon in general. I guess, can you speak to the conversations that you're having there and if it's resulting in any early demand flows, that's something more on the come as we kind of look through whatever the end of this year into next year?

Yes, John, this is Ed. Obviously as you mentioned, it's a big deal around the country at this point with PFOS and PFAS. Each carbon that's used for these have unique chains and molecules. And so you really have to test the product first to see whether it's got efficacy for the particular PFAS or PFOS or PFED that you've got in the system. And so we see that opportunity is something for us to do with our powdered-activated carbon products. But we're really trying to make sure that we maximize the sales rate as well as the profitability as we go into those markets.

Got it. Okay. Makes sense. And then just a question on the PM business, can you speak to the pricing environment that you're seeing and how much that contributed to the margins? Just first running without downtime, because again, we've seen periods when you haven't had much downtime and we haven't seen margins quite like this. So just wondering how much pricing might have contributed to that?

Yes, John, for us it's -- we look at it for year-over-year, year-over-year opportunities for us. And so we continue to add price mid-single-digits as we move forward throughout the year. Sometimes it will be lower or higher, but we try to make sure that we're continuing to capture the value that our products do for the products that we have.

And when you think about it, most of that price increase really sits on the activated carbon itself and not so much on the honeycomb. So if you're building your models, John, you can think about that.

I think prior quarters, I'll chime in here, prior quarters we were talking about process purification when auto production was a bit depressed. Now auto production is on the rise, so you're getting that mix benefit as well from process purification applications into the activated carbon for autos. And a good piece of that margin upgrade is related to that mix upgrade.

John, I would actually encourage you, so as I was driving in this morning, I was listening to CNBC and they were talking about Ford's, I guess either monthly or quarterly sales numbers, right? And the headline numbers like, well, ICE is down, traditional ICE is down and EVs are up, right? But ICE was down some percentage. All electric EVs were up some percentage, but hybrids were up 59%, right? And a hybrid is for us, basically another internal combustion engine. And those are sales, right? And then they came and actually talked about, because you could argue that a lot of Ford's EVs, so all electric sales were then trying to clear inventories by cutting price on the lots to get the Mustangs and all that stuff moving, right? So we look at obviously what drives us is production, right? But you can look through and I would encourage you as you guys think about this, to understand that dynamic because I thought that was a very telling set of statistics, right? You've got EV sales up, but they're clearing high price stock cutting price, trying to clear their inventory. Where they're building are in hybrids. And that is very, very encouraging for us and we expect that trend to continue and not be just at Ford.

The next question comes from Ian Zaffino from Oppenheimer.

Wanted to ask you, I guess on the previous question on the hybrid side is, what you're seeing in the market pretty much accurately reflects what you guys are saying about hybrids doing much better. But when you talk about it being, let's just say similar to an ICE vehicle, I think those are yours or something similar, do we -- is that because the OEs are using common parts for both ICE and hybrid or basically why is that happening? Because I thought the understanding was that hybrid vehicles would have smaller tanks and therefore lower need for activated carbon. Is that not the case? And if that's not the case, kind of give us a little detail on what's going on there.

Yes, Ian, it's Ed. With hybrids, you've got relatively small vehicle with small gas tanks. As it comes around to fill up those gas tanks, you have to kind of depressurize the system and so you need that same amount of activated carbon on that fuel tank as they depressurize the fuel tank, it rapidly goes into a canister system where the activated carbon captures it. So it's almost from my perspective, we also have some honeycombs and carbon on those systems depending on the mechanism that each individual OEM is trying to do for those vehicles. So I still like the hybrid vehicle. It's really gaining share. It's up if you look at cross Q1 plug-in hybrids and hybrids we're up 320 basis points. And so you see kind of just the auto -- as people are looking for what they're going to buy next, they're really excited about the hybrids and the plug-in hybrids.

Now when you think about it, Ian, hybrid represents a very good solution for most consumers, right? I mean, I use myself as an example. I live about 10 miles from the office, right? So I can go back and forth from work running the electric, right? But when I need to take the long trip to take my kids somewhere or whatever, right, then that you have that flexibility and it removes that range anxiety. So -- but 95% of the time it's running electric, right? And so I think consumers, when you look at that versus relative price point of these things, right, consumers are saying, well, this makes the most sense, right? And we're just benefiting from that.

Understood. Okay. And then on the AFA push, I know there's a lot of testing certification. Maybe can you give us an idea of how that's going, maybe versus expectations or success rate or anything along those lines as far as just color on how that's going.

Ian, it's just a very slow process, right? I mean, we unfortunately don't control it, right? It's one of those few variables that we can't really control. We have a very active dialogue with the regulators. We're talking to them almost continuously. So what we're doing is we're continuing to work with customers to try and drive and get them interested and test. And then we obviously put these things into the certification process. Where we're having the most success, really, frankly, is some in our -- mostly in our pavement technologies business, some other commercial, industrial applications, oil field and others. But it's encouraging because as these certifications and we're able to clear, I mean, I think we're going to see us be able to have more success, but look, we're managing it. We're going as fast as we can. And we feel good about the progress relative to what we can actually do.

The next question comes from Jonathan Tanwanteng from CJS Securities.

Congrats on a nice carbon materials quarter. I was wondering if you could talk a little bit more about the mix shift towards hybrids and possibly away from large trucks and SUVs where I think you've traditionally had more content. Has that factored into what you've seen in the quarter and are the ASPs on the hybrids comparable to the content -- excuse me, the content levels there comparable to what you saw in those larger vehicles?

Yes, so we love F-150s. We love full-size trucks. We have a significant amount of content on them because they have large fuel tanks and generate a lot of vapors coming out of them. But that being said, even with smaller vehicles, the heat of the vehicle can drive more emissions coming out of the fuel tank as well. So it depends really on the type of vehicle and the design that they've got and the space that they have to have. And in a lot of cases, they have to put additional content on a canister with additional honeycombs so that they can meet the requirements that the EPA has in place.

Okay. Got it. And then just a quick question on the industrial specialties business. I was wondering if you could comment on the profitability on that 2/3 of that $100 million, if you're making any money on that, if it's relatively neutral, just given the...

It worked against us. We would have been better if we didn't have it.

The source subject here, John.

Fair to say it's loss-making then?

Yes.

No, well, we're talking about the 2/3 that we're keeping.

Are you talking about the 1/3 that we give?

Are you talking about the 1/3 or the 2/3, John?

No, the 2/3. I know the 1/3 isn't so great.

Yes. The 2/3 is the stuff that's making money.

Yes. Right. Sorry about that. Make sure you get that straight. We would prefer...

Can you talk about -- quantify the degree of profitability then?

What's that?

Is it possible to quantify or ballpark the degree of profitability on those sales?

No, we don't get into EBITDA at the product line.

And it's too convoluted, John. I mean, look, the best way to describe it is that the 2/3 that we kept are -- that Mary's referring to is stuff that we continue to be -- we expect to be recurring. These are markets that we're going to continue to participate in. The 1/3 that came out of DeRidder wind-down was effectively loss selling because we were exiting those markets and as we talked about, we're exiting markets that are lower-margin, not things that we consider attractive going forward, right? But you're going to have a hard time with that time in this quarter because this is the first quarter before things get rolling.

Right. And I understand that in the Performance Chemicals results for the next couple of quarters will be hard to see in spec because paving season kicks in and you've got road technologies and their profitability profile kicking in. But really all we can say is the 2/3 that we kept, we kept it because it's making money.

Next question comes from Mike Sison at Wells Fargo.

Hey, nice start to the year. I guess for Performance Chemicals, is the way to look at if you add back the $26.5 million loss to EBITDA and that net number is kind of what the ongoing entity is sort of producing? So it's kind of a 10% EBITDA margin for Q1, but that should scale up as road technologies kicks in gear in 2Q and 3Q?

I don't think that's the way to look at it, right? I mean, I would argue the other way, right? Meaning that if you wanted to look at it from a cash basis, right, the business lost about $30 million this quarter, right? The negative 10% of EBITDA loss plus the -- right...

Plus the CTL.

Right. The CTL results. Now we are, and you'll see this in the 10-Q and all of Phil Platt's incredible disclosure, but we are -- the excess CTO that we are buying, we are going ahead and marking that to market or what we think is a more reasonable price. So you're going to see that run through as sort of a noncash charge that will fall through, not in the EBITDA, but in the other income and expense, right? And also in the statement of cash flow, right? The CTO that we're running through, we're running through a cost and that's going to impact the profitability of the segment, right? So you just have to kind of look at those. When I look at it, right -- and then we offset that with the sales, right, the CTO that we do. So you look at this quarter, we had kind of $20 million of cash losses. That's a function of the hit that we were paying to our supplier offset by the sales that we were able to make in the market. And they were not one-for-one. So -- but in the quarter, we lost $20 million on that sort of netting out. And then on top of that, there was about a $6.8 million adjustment as we took the write-down on the excess that we're still holding to bring it down. So going forward through our P&L and our statement of cash flow, to the extent we do, do resales now and we get better than where we've marked it to, it'll be up or down, but it'll be less volatile, right? But you need to understand that we're going to continue to be taking excess CTO for a while. So you're going to see that run through, right?

No, I understand.

But we don't -- from an EBITDA perspective, these are not our ongoing primary operations. So it's not included in EBITDA. This is not our -- a business that we're in, right?

Right. Right. No, understood. And then I apologize if I missed this, but for Performance Materials, what do you think the sales growth is going to be this year?

Well, we don't bring it out by, but I mean, I think we expect sales. I mean, you can look at the first quarter, you can look at what we did last year. We expect our sales to continue to grow at a pretty healthy clip, right? Maybe not as strong as last year, but certainly from...

We tied to auto production.

But we tied to auto production and we see that improving.

And Q1 -- right. And Q1 actually auto production was a little bit softer…

Right.

Than had been originally expected. So Ed's results definitely benefited from that price increase that we talked about as well. Going forward, the auto estimates are expected to strengthen throughout the year. Production is expected to strengthen throughout the year. And we should see the benefit of that.

I mean, we've sort of -- we've said this before, Mike, I mean, we sort of directionally track IHS. And we obviously look at a lot of different sources, banks, economists.

Customers.

Customers being the predominant input, right? And then we look at a calculation of ICE/hybrid production by region, right? And then that kind of gives you a direction of what we think things are going to look like, right?

Got it. And then last one on APT, do you think we've bottomed here and start to get some sequential improvement in sales or we still got a little bit of a headwind in 2Q before hopefully things get better in the second half?

So we did see 2 quarters actually in a row sequential improvement. So we are hopeful that we are at the bottom. I'd like to see another quarter or so and see that momentum continue. But clearly they did take a hit from the global slowdown, industrial demand weakness, but they have been able to generate 2 quarters of sequential improvement.

Right. And the other thing like I would say is we are very proud of the margin because we have these kind of falloffs in volume. Getting your cost structure to reflect that and get your margin in position is not a simple undertaking. Now obviously they were benefiting from energy, but I would argue that might have been an artificial negative a year ago, right? So -- but for them to be able to kind of grapple with this and keep their margin percentages where they are, that took a lot of hard work. With regards to the industrial economy, look, we look at it and we're encouraged, as Mary said, but we're also just not going to call it until we see a little more time, right? It's been fragile, it's been bouncing around the bottom, looks good, feels good, but we're just not going to call it till we get a little more time under our belt.

And it was volume improvement, which is what we've been keying off of to try to assess whether we're seeing a healthier demand environment going forward.

The next question comes from Chris Kapsch from Loop Capital Markets.

I have a couple of follow-ups. First on [ in spec ]. So the business that you're exiting, I understand the losses and obviously the ability to get pricing there is just not great. And it's probably the most competitive, but could you just characterize your ability to get pricing in the [ in spec ] business that you'll be sticking with because you still have this CTO inflation?

Yes. So I mean, the biggest issue really centers around rosin pricing, right? Chris, rosin, as you know our rosin is mostly in sort of what I would call industrial applications and highly vulnerable to substitution, right? It doesn't help that some of our competitors in traditional crude tall oil-based rosins have a better cost structure than us, but we have to respond to that and we have to deal with that, right? And that's because of the CTO, but most of the stuff that we exited and this is predominantly a function of DeRidder. DeRidder was really run as a rosin site, right? I mean, that's really where it made its money. And then it also had the advantage of selling some TOFA into the oil field markets, right, because it's obviously producing TOFA. But when you look at that in the aggregate, you have to kind of ask yourself when you run a ton of CTO and where it's end markets are positioned, does it make economic sense for the enterprise, right? We feel like what the footprint that we have today is more in balance, right? That's predominantly because the Charleston plant's primary end market is road technologies, right? And so those are the markets that it's serving. It does have some rosin that comes out that aren't needed in those markets, but things like Ozark help with that because they use rosin, right? But generally speaking, it makes that rosin problem a lot smaller relative to the value that you get from the TOFA. That's the best way to describe it.

Yes. I got it. Makes sense. And then the follow-up on the PM segment was around the hybrid discussion. I'm just curious if to the extent you're getting mix lift, is there any way to characterize how much benefit you're getting from your products for the new technology where you have IP, the low-purge engine technology? I think that's at play both in hybrids as well as maybe just advance model of your platforms.

What percentage of your sales are covered on new patent today? Probably the best way to...

Yes, within North America, there's a high level of patent protection across those, right? As it's a Tier 3 requirement, which you're looking to get extremely low levels and the canisters themselves with activated carbon help, but you need, in a lot of cases honeycombs. Some of those honeycombs vary on their content and efficacy. And we help the OEMs and the Tier 1s to help design the canister system that they're looking to put our products into, right?

And that's important, Chris, because most of this hybrid push is in North America today.

Yes. With China 7 coming along...

Right. Eventually we'll benefit in China, right?

Right.

We have no further questions, so I'll hand the call back to John Nypaver for closing remarks.

Thanks, Adam. Well, this concludes our call. Thank you all for your interest in Ingevity and we'll talk with you again next quarter.

This concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.