Ladies and gentlemen, thank you for standing by. And welcome to the Ingevity Fourth Quarter and Full Year Earnings Conference Call. [Operator Instructions] As a reminder, today's call is being recorded. I would now like to turn the conference over to our host, Vice President of Investor Relations, Mr. Dan Gallagher. Please go ahead.

Thank you, Kayla. Good morning, everyone. Welcome to Ingevity's Fourth Quarter 2017 Earnings Conference Call. Earlier this morning, we posted a presentation onto the Investors section of our website. If you haven't already done so, I would encourage you to download this file so you can follow along on the call. You can find it by visiting ir.ingevity.com under Events and Presentations. On Slide number 2 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 in our SEC filings, including our Form 10-K and most recent Form 10-Q. Ingevity undertakes no obligation to publicly release any revision to these projections and forward-looking statements made during the call or to update them to reflect events and circumstances occurring after the date of this call. 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. Our agenda is on Slide number 3. With me today are Michael Wilson, President and CEO; and John Fortson, Executive Vice President and CFO. First, Michael will comment on the highlights of the quarter and the full year. He'll then review the performance of our 2 segments and give some perspectives on our outlook for 2018. John will discuss our current financial status and our 2018 guidance. Then Michael will make some brief closing remarks before we open the line for questions. Mike Smith, President of Performance Chemicals; and Ed Woodcock, President of Performance Materials, will join for the Q&A session. And with that, I'll turn it over to Michael.

Thanks, Dan. Good morning, everyone. Thank you for joining us this morning and for your continued interest in Ingevity. If you'll turn to Slide 4, you'll note some highlights for the quarter and full year 2017. All in all, we had an outstanding quarter, and our financial results exceeded our expectations. 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 typically modestly slower in the fourth quarter due to U.S. auto production holidays. However, in the quarter, we realized higher sales of Performance Chemicals products to pavement applications based on weather patterns that extended the paving season. What's more, our Performance Materials segment sales were higher than expected due to stronger than forecast U.S. and Canadian auto demand. Revenues in the quarter were about 9% higher when compared to the previous year's quarter. Volumes, price and product mix, and benefits from foreign currency exchange all contributed to the increase. We delivered adjusted EBITDA of $53 million, which was up $17 million versus the prior year's quarter and reflects a 46% increase. These strong increases were driven by enhanced productivity and lower raw material costs in addition to the revenue impacts. Our fourth quarter adjusted EBITDA margin of 22.9% was up 580 basis points from the prior year quarter margin of 17.1%. Also on the slide, you'll see the results for the full year. Clearly, 2017 was a noteworthy one for Ingevity. We executed our operating and strategic plans well, orchestrated a marked turnaround in our Performance Chemicals segment, maintained strong growth in our Performance Materials business, leveraged the new lower-cost structure we created in 2016 and delivered outstanding…

Thank you, Michael. Good morning, everyone. First, I'll provide some additional color on our financial performance of the quarter and over the fiscal year. Second, I'll review our cash generation and capital structure. Finally, I will discuss and provide some additional details on our guidance for 2018. Turning to Slide 8, as Michael mentioned, performance in the fourth quarter and the full year was outstanding. We executed well in both segments and continued to show margin improvements across the businesses as they grow. Savings in CTO costs as well as other cost-control measures have helped us to deliver margins of 16% in the Performance Chemicals segment. We remain confident in our ability to drive margins In that segment above 20% with the benefit of the Georgia-Pacific transaction, which will both accelerate and strengthen the chemicals segment's margin profile. The Performance Materials segment turned in a strong fourth quarter and full year with quarter margins above 41% and over 40% for the full year. SG&A, including research and technical expense, as a percentage of sales, when compared to the 2016 number was up $12.2 million to 13% for 2017. Net interest expense for the year was $15.8 million, down from $17.9 million last year as we paid down $96 million of net debt. Our GAAP tax rate for the year was 17%, favorably impacted by $24.5 million tax benefit due to the U.S. tax reform. Our adjusted tax rate, excluding the impact from the U.S. tax reform, was 31%. Regarding U.S. tax reform, as a U.S.-based specialty chemical and materials manufacturer, we are heavily invested in the United States. 5 of our 7 manufacturing plants are here in the U.S., which have created deferred tax liabilities for Ingevity as a whole. As a result of U.S. tax reform, these deferred tax…

Thanks, John. In summary, as we kick off 2018, we are optimistic it will be another strong year performance for Ingevity. Our focus is on implementing our growth strategies while operating efficiently and holding the line on costs. We continue to believe very strongly in the long-term potential for our company. We hope you share our enthusiasm for Ingevity. At this point operator, we'll open up the call to questions. Thank you.

[Operator Instructions] Our first question comes from the line of Jim Sheehan with SunTrust. Please go ahead.

Good morning, guys. Thanks for taking my question.

Good morning, Jim.

Could you talk about the likely margin expansion you'll experience in Performance Materials in 2018 that you're assuming in your outlook?

Yes, I think it's just what we said historically. We expect margins in that business to accrete gradually over the near-term horizon.

Can you talk also about in Performance Chemicals, the outlook for TOFA and TOR prices. It looks like there is some price increases in the market. What do you think is the likely capture rate that you'll get on price increases?

Yes. Jim, I don't want to talk specifically about price increase plans or our expected outcomes. I prefer to answer your question more in terms of market dynamics that we see. I think, as you're aware, as we discussed, we continue to see favorable dynamics for TOFA and derivatives. That market, over the past 12 months, has tightened considerably with the rebound in oilfield. We continue to see the rosin market as being fairly tepid from a demand standpoint. So all that being said and when we look at the - on the supply side, we have seen improvements in Chinese gum rosin prices over, really, the last 12 months, in the second half of 2017. So that's favorable sort of countered by the additional hydrogenated hydrocarbon resin capacity that's come on. And then, I think, on the FAST and oil side, probably the most significant factor is the increase in palm oil production that's happened in the current crop, which is leading to some oversupply in Asia. So with - against that backdrop of market dynamics, we're also experiencing some inflationary pressures, like most companies for the first time in a number of years, particularly around energy, freight logistics and other items. So clearly, we are going to try to offset those margin increases, and we'll also try to capture the most value that we can for our products.

Great. And in Performance Materials, you talked about not expecting much in 2018 from China. Can you talk about the adoption - early adoption in some of the provinces there in China? What your outlook is for that? Any provinces that are making noises about early adoption?

Well the only province that has announced early adoption is the Hebei province, which, again, surrounds Beijing and Beijing province in China. So again, as a reminder to everyone, the national regulation requires for full adoption China-wide by midyear 2020, whereas the Hebei province has decided to go early. And I think, Ed, its midyear 2019 or September 2019?

January 1, 2019.

I'm sorry, January 1, 2019. So Hebei is the only province to this date that has made a specific announcement. There continues to be chatter that other provinces may go early. There is still time for that. But I would prefer not to speculate.

Thank you.

And our next question comes from the line of Jon Tanwanteng with CJS Securities. Please go ahead.

Good morning, gentlemen. Congrats on a great quarter. I just wanted to ask what's your modeling for the U.S. adoption rate exiting 2018 given that there is no mandated milestone to hit. What's built in your outlook and kind of - is it kind of holding at a 60% that they had hit at the beginning of this year?

That's a great question, John. I'm going to let Ed Woodcock comment on that.

Yes, John, our expectation is that we'll see more volumes in the first half of 2018, but that's dampening into the second half or at least increased impacts first half versus second half.

So, John, if you think about the way this works, it's not on a calendar year, but it's on a model year. So typically, for example, 2018 model year vehicles began being introduced in the second half of 2017. So by the time we get to the back half of 2018, there won't be a mandate for higher adoption. But the step-up for 2018 model - vehicles should help us through the first 2 quarters of 2018. Does that make sense?

Got it. That's helpful. And then just for comparison purposes, I think you mentioned a 50% cash tax rate for 2018. What were your modeling before the tax reform? Just to help us understand what the benefit is year-over-year.

John, do you want to take that?

Yes. I mean, we had - our effective tax rate historically, we were looking at kind of being in the low 30s, 31%, 32%. And in fact, our cash tax rate for '17 was about 31%. So we, absent any changes, I think it would've looked roughly the same for next year truthfully.

Okay, perfect. That's helpful. And then just any update on the business levels at Georgia-Pacific, what are they seeing relative to yours? Is it the same industry drivers and oilfield and rosin or whatever end markets they're in? Any update there? And number two, what is the seasonality there, so we can model the [indiscernible]?

Yes, John, I guess, just to preface the response. I mean, clearly, we don't have great visibility yet as the transaction is not closed. But perhaps Mike Smith has a few comments in terms of what we do know.

Yes, sure. I - from everything we have been able to learn and obtain, we believe that the financial performance should be very much in line to what we indicated last August. Their business does not have a strong pavement segment. So in some respect, their business is less seasonably impacted and kind of more stable throughout the year. But overall, given the improved dynamics in the overall business, we expect that the business will be strong when we take it over, and we'll be able to continue to improve on that performance going forward.

Great. Thank you very much.

And our next question comes from the line of Ian Zaffino with Oppenheimer. Please go ahead.

Hey, good morning, guys. This is Mark on for Ian. So I guess, I just wanted to dig into pavement a little bit. So going into 2018, I know, you guys identified a few areas of growth. I was just wondering, like, is this, like, more on the adoption of new technological capabilities? Or is it just more on the strong demands from these growth pockets? Thanks.

Yes, Mark. It's great question. When you look at the historical growth rate that we've delivered in the pavement technologies, it's sort of in mid- to high single digits. That's clearly at a much higher rate than infrastructure spending is growing overall. So we really do believe what's driving it. It's a technology adoption story. And this is particularly strong for our Evotherm line of warm mix asphalt products. So that's continuing. And I would say the other thing that it - that's being augmented by is just some improving market conditions and geographies outside the U.S. I mean, keeping in mind that this business is - for us is a U.S.-predominant business, but geographic growth is incrementally positive.

Okay, got it. That's very helpful. And then just a quick one on the free cash flow guide. I know, like, you guys mentioned that CapEx is going to be a little bit higher, but then, like, you do have higher EBITDA and lower tax rate. So I was just wondering is there anything else in there that's kind of holding it to the $90 million to $100 million range?

Well, there's a - this is John. There's also a working capital build.

Right. Okay, okay. That's exactly what I kind of want to get to. Is there, like, meaningful build from working capital. Okay...

Right. And - right, as we alluded to in the call - or in the prepared remarks, we are going to be building inventory over the course of 2018. The sort of demand pickup is quite dramatic when you step into 2019. So you'll see our working capital increase. It will reverse itself once we get on the backside of this. But so it's sort of a temporary glitch, but it's an important thing. Ed, maybe you want to comment about timing and why that happens.

Yes. I mean, so as Michael talked about earlier, Hebei province is scheduled to implement 1st of January. And there are opportunities for other provinces to adopt earlier, and we're not going to speculate on that. But it's our responsibility to have products available and be able to supply if and when any of those provinces move forward with an earlier implementation.

Yes, Mark, so just to recap. The working capital build that John and Ed are talking about is isolated really to Performance Materials. It is being done intentionally and somewhat strategically, just to be sure we're prepared for any potential early adoption in China.

I mean, just to build on. I mean, I would argue that. If you look at the Performance Chemicals segment, they have actually done an incredible job. I know you guys can't see it, but they've done a great job of managing down their inventories and working capital, so.

Okay, got it. I guess, like, through the - I guess, like, through 2018, what's the sort of expectation there, like, more build in the first half or, like, building in the second half to prepare for 2019?

I think, it will be gradually throughout the year and that inventory really should peak at the end of 2018. And again, as John said, going forward, as we see the demand start to occur in China, we would expect to draw those inventories down.

Okay, terrific. That's very helpful. Thank you, guys.

[Operator Instructions] Our next question comes from the line of Mike Sison with KeyBanc. Please go ahead.

Hey, guys. Nice on the 2017. So in Performance Materials, I'm pretty impressed, you can grow EBITDA double digits, given that it sounds like revenue growth was a slow little bit. So why does honeycomb - why is honeycomb going to be better in '18 versus '17 as a result of some of the slowing revenue?

Well, again, Mike, as I was describing in an answer to an earlier question, the 2018 adoption is relevant to all 2018 model year vehicles, right? So when you look at year-over-year comparisons, the regulatory requirement in the first 2 quarters of 2018, there is a step-up over the first 2 quarters of 2017. So we should continue to see year-over-year growth through those 2 quarters, then with a moderating of growth in the second half of the year, as there's no regulatory mandate above what we saw in the last 2 quarters of 2017.

Got it. Okay. And then in China, have you worked with some of the automakers and - or have you been specked into some of the potential vehicles that need to be regulated in, I guess, '19 is the earliest and 2020?

No, I think it would be an understatement to say that we're working with some of them. The vast majority of all of them, whether they are international or Chinese domestic OEMs. And I would say, at this point in time, because of the timing of the pending regulations, every automaker is in the process of making design changes, canister selection and product selection in order to be prepared for the implementation. Ed, would you add any color to that?

Yes. I would say they're well on the way of finalizing. And in most cases, they probably finalized over 50% of their platforms. And the carbon choices have been made. And our estimate is that we're gaining share relative to what we originally anticipated.

Great. And then one quick question on the chemicals side for oilfield. I recall that being a pretty big business at one time. And as you noted, oil has recovered quite a bit here. What's the potential now for that business, as you think about where we're at in terms of the oil prices and where drilling is at?

Look, Mike, I think as long as oil prices stay in the range that they are today and probably, you could really say anywhere above $40 a barrel, U.S. shale producers have an economic reason to continue drilling and producing. So we're actually quite bullish on oilfield demand for 2018. I don't think we're going to see the same sort of year-over-year increase on a percentage basis we saw in '17 versus '16. But we're anticipating very strong growth in that segment. And it's just hard to predict what ultimately is going to happen to global crude oil supply demand and what's going to happen to pricing, but as long as it stays in the range it's in, we would continue to expect strong demand.

Great. Thank you.

And our next question comes from the line of Daniel Rizzo with Jefferies. Please go ahead.

Hey, guys. How are you?

Morning, Dan.

Any change in the adoption new standards in Europe and the outlook there? I know you've talked a lot about China and U.S., but I was just wondering if there's any color on what's going on in Europe?

Well, there's no change from last what we reported. But China did adopt the Euro 6 standard, right?

Europe. Yes.

I'm sorry, is that not the question?

Yes. You said China.

I'm sorry. China. No, in Europe, they did adopt the Euro 6 standard, which essentially is going from 1 day of capturing particle emissions to 2 days. So it doubles the amount of carbon essentially that would be needed on a per-vehicle basis. Again, just as a reminder, Europe is about 15 million vehicles, about half of those are diesel. So it's a much smaller market than North America and/or China. And Ed, just remind me the timing of the implementation of that Euro 6.

Yes. It's September of 2019. And there is no upside for OEMs putting any volume in sooner. So we expect that to be a 2019 impact and not a 2018 impact.

The shift - is the shift from diesel to gas or to gasoline engine in Europe, is that - I mean, is that a tailwind now? Is it something that's been talked about before? I was just wondering if you're seeing the impact of that or if there is any?

No, I think the shift away from diesel as long as it goes to gasoline vehicles is a tailwind for us. I don't think it's a big mover at this point. I mean, because you also have the continued adoption of electric vehicles, which is going the other way. So all in all, the diesel trend is favorable, but just not a big mover.

Okay. And then finally, and excuse me, if I missed this. But have all you CTO contracts - the old ones, have they all rolled off in the last year or so? Or there's still more to go?

In terms of CTO supply, we source CTO from any given time, could be a dozen or more pulp mills. Those contracts are all on a rolling basis. So they're constantly rolling off and being renewed. The exception to that, obviously, is the supply agreement that we have through WestRock that we secured with the spin of the company, which was a 10-year agreement, beginning in 2016. And of course, once we close the acquisition, the G-P pine chemicals business will also have in place the supply agreement from G-P, which is a 20-year time period. And I think, Mike, combined those 2 are somewhere in the neighborhood of 70% of our requirements assuming we're running at capacity.

That's correct.

Okay. Thank you very much.

[Operator Instructions] Our next question comes from the line of Chris Kapsch with Loop Capital. Please go ahead.

Yeah, good morning. I had a couple of follow-ups, may be for Ed, actually, on what's going on in China. You mentioned before that you're - you believe you're gaining shares as we approach this China 6 standard and mentioned again today. Can you just talk about what the drivers are? Is it that the carmakers are just opting for your higher BWC product? Or is there something more to it in just terms of maybe the regime over there getting more serious about environmental compliance that's tilting in the market in your favor?

Yes, Chris, I think it relates more to what we've been doing for the last 4 years, providing a low-risk product that has life of vehicle performance and a set of products that allow greater design flexibility within the vehicle themselves. Our products have a long, long history of being used for the life of the vehicle. And as China moves into a new regulation, there is a need for them to be able to meet and pass this regulation, because there is also stiff penalties if the vehicles do not perform to meet the regulation. So overall, it's just basically what we've been doing the blocking and tackling that we've been doing for the life that we've been in this application and it's being recognized by our customers in China.

Yes, and Chris, I would add, the more stringent regulations do require higher-performing carbon products. And I think we have seen them tend to move towards a high-absorption, higher BWC products, which again plays to our advantage.

Right. That will make sense. And then just the fact that - there was some, I guess, hit associated with having to export some of those products being produced at the plant there prior. But now that you're, sounds like, transitioning to sort of inventory build mode ahead of this adoption standard. Is it safe to say that you think you're fully through the sort of the qualification stages that's necessary with this plant?

Well, again, Chris, see - we guess to see the demand from the new regulations begin in China. But we do continue to operate the facility in Zhuhai. We need to keep both operating it and like every other of our facilities, we have to keep working to improve the productivity and efficiency of that plant. So we're going to continue to export product from there until China is in a position to consume the demand. But I think you're referring to some things we talked about in the third quarter earnings call, back in the fourth quarter in terms of some additional costs from export. We're still incurring those to the degree that we export to other countries in terms of the - in terms of VAT costs. But those are really at this point embedded into our outlook and our guidance.

Okay. And then speaking of guidance, just to include the impending acquisition. As you pointed out, it expresses, I think, your high degree of confidence that this is going to get approved. I guess, the question I have is twofold. One, are you highly confident that there is - it sounds like it's the case, but no conditions associated with that approval. And second, in the guidance, is there - the acquisition you've talked about some level of synergy capture, also does the guidance reflect capturing any of those in '18 now that the - that you have a little bit better visibility in terms of the near-term timing of closing that deal?

Yes, I guess, the way to best put it, first of all, there is no, like, certainty in any regulatory process. But we are highly confident that the acquisition will clear, that we'll be able to close it, again, no later than the end of Q1. We don't expect, at this point, on everything that we know to have any sort of remediation requirements associated with that. So I think, again, for modeling purposes, your safest assumption is to assume sort of end of Q1 that it's in our guidance for the balance of the year. And that's - I'll just probably leave it there, I think.

And - but is there anything...

In terms of synergies, obviously, we will move to capture those as quickly as possible to the degree that we believe that there is opportunity in 2018 with that timing and the close, it's in our guidance.

And our next question comes from the line of Jim Sheehan with SunTrust. Please go ahead.

Thanks. With the acquisition, what should we assume for depreciation and amortization for Performance Chemicals in 2018?

Yes, look, Jim, I would tell you just once we get the deal closed that there's still a lot of moving variables on allocations of goodwill and the intangibles, right? So once we get the acquisition closed, you'll, obviously, see we will have to file the pro formas and the historical financials, and you'll be able to take a better view. Obviously, the number is going up, but I'd rather reserve judgment on that until you actually see stuff when we get through the process.

Okay. And can you talk about longer-term outlook for the ramping of honeycomb scrubbers outside the U.S.? When would you expect the regulations to require the use of that product outside the U.S.?

Jim, that - we would be speculating to predict that. At this point in time, there are no regulations that require the use of honeycomb scrubber outside U.S. and Canada.

And then in terms of your IP in the honeycomb scrubber, the patent rolls off at certain point. What are you doing to ensure that you still have a competitive advantage in that market once the patent expires?

Well, in short, we continue to innovate every day to improve the performance of our products to raise the technical performance barriers. At the same time, we also continue to protect our IP through the patent process where it's applicable. There've been some recently filed patents, at least one recently issued patent, that we think will provide some protection, at least a portion of that market beyond the 2022 time frame. And I guess, without getting into the further details of that now, I would encourage you to dial in or login to our webcast later today of our Investor Day. We're going to talk about that issue and a number of longer-term items.

And on your CapEx, stepping up to $85 million this year, what do you expect to happen in 2019? Does it stay at that level or moderate?

I think there will be additional spending in 2019, not necessarily over and above, but it will remain at a more elevated level in 2019, and then we'll begin a process of moving back. Because - I mean, it's not - we've got additional capacity expansion on the material side. It's more than just what we talked about for this year. We have additional plans as well.

Thank you.

[Operator Instructions]

Okay. Since there are no more questions, I'd like to thank everyone for your time and interest this morning. We remain very positive about our long-term outlook for Ingevity. In closing, I would like to invite you to join the webcast of our Investor Day presentations today in New York. You can access the webcast via link in our Investor Relations section of our website at www.ingevity.com. The presentations will begin at 1 p.m. Eastern Standard Time this afternoon. Thank you, again, for your time and interest in Ingevity.

Ladies and gentlemen, that does conclude our conference for today. Replay will be available after 12:30 through Wednesday, March 21, 2018. You may access the AT&T teleconference replay system at any time by dialing 1 (800) 475-6701 and entering the access code 443141. International participants may dial (320) 365-3844. Those numbers again are 1 (800) 475-6701 and (320) 365-3844 with the access code 443141. Ladies and gentlemen, that does conclude our conference for today. Thank you for your participation and for using AT&T Executive Teleconference. You may now disconnect.