Ladies and gentlemen, thank you for standing by. Welcome to the Ingevity Second Quarter Earnings Conference Call. [Operator Instructions] Today's conference is being recorded. I would now turn the conference over to your host, Vice President of Investor Relations, Mr. Dan Gallagher. Please go ahead.

Thank you, Trisha. Good morning, everyone. Welcome to Ingevity’s second quarter 2018 earnings conference call. Earlier this morning, we posted a presentation under the Investor 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 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 our 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 or 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 3. With me today, are Michael Wilson, President and CEO; John Fortson, Executive Vice President and CFO. First, Michael will comment on the highlights of the quarter and then review the performance of our two segments. He will also discuss some new developments grown into our Performance Materials segment. John will discuss the current financial status and our revised 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 the call for Q&A. 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 with me to Slide 4, you’ll know some highlights of the quarter. As you can see, we drove an outstanding second quarter performance, a strong organic growth has been augmented by the Georgia-Pacific pine acquisition and our profitability is being accelerated excellent commercial and operational execution. Each of our businesses across all of our end used applications is delivering to or exceeding our expectations. Revenues in the first quarter were over $308 million which is more than 18% higher when compared to the previous year's quarter. While volumes were by far the largest driver to the company's financial results, product price mix and strong productivity also continue to be solid contributors. Adjusted EBITDA was over $89 million up 33% versus the prior year's quarter. In addition to the revenue impacts, lower production costs predominately in the form of lower crude tall oil, or CTO costs aided our results. These positives were partially offset by higher freight costs and increased SG&A including research and technical expenses of $6.5 million, yet as a percentage of revenue, SG&A remained nearly flat period-over-period. The primary drivers of the increased SG&A were higher legal costs, variable incentive compensation and cost incurred to support our growth. Our first quarter adjusted EBITDA margin of 29% was up 320 basis points from the prior year quarter margin of 25.8%. On a pro-forma basis, adjusting our historical financial results as if the G-P acquisition had been completed in 2017, our second quarter revenue increased by almost 9% and our adjusted EBITDA increased almost 23%. As you can see on Slide 5, our Performance Chemicals segment posted another excellent quarter. Segment sales in the second quarter were over…

Thank you, Michael. Good morning everyone. First I’ll provide some additional color on our financial performance in the quarter and over the first half of the year. I’ll also review our cash generation and capital structure and last I’ll provide some additional details on our revised guidance. As Michael mentioned the second quarter was very strong. On Slide 9, you’ll see some key income statement metrics for the quarter in first half of the year. Revenues of about 309 million in the second quarter and about 544 million for the first half were up about 19% and 14% each from the prior year period respectively. Adjusted EBITDA of over 89 million and almost 157 million for the second quarter and first half of the year respectively were each up 33% from their prior year comparable periods. Second quarter adjusted EBITDA margins increased 320 basis points compared to the prior year quarter and 430 basis points when compared to the first half of the prior year. As Michael discussed, the Performance Chemicals segment had another outstanding quarter. Net sales were up over 24% and segment adjusted EBITDA was up over 48% resulting in an increase in segment adjusted EBITDA margin of 360 basis points from the quarter a year ago. And looking at the half, the segment drove a sales increase of 15% in a segment job and segment adjusted EBITDA of almost 52%. As a result, segment adjusted EBITDA margin was up 490 basis points from the first half of last year. Clearly, we are benefiting from the Georgia-Pacific Pine Chemicals acquisition. In addition, as industry dynamics had improved for many of the Performance Chemicals applications, our team has done a remarkable job in leveraging the positive environment into impressive results. Also we have continued to see the benefits of…

Thanks John. In summary, we’re confident we're in the midst of another strong year of performance for Ingevity. I appreciate the work and efforts of our 1,600 employees worldwide they are distinct competitive advantage for us. We continue to believe very strongly in the long-term potential for our company and we hope you share our enthusiasm for Ingevity. At this point, operator we’ll open the call up to questions.

[Operator Instructions] And we'll open the line of [indiscernible] with Bank of America. Please go ahead.

Firstly regarding the 80 million buyout of the 30% in Purification Cellutions. How do you plan to finance that simply from a cash from your balance sheet and cash flow from operations?

That's right [Roger].

And thanks very much for giving the G-PPC sales and EBITDA for Q2 2017. Would it be possible to provide for us the prior three quarters Q3 2017, Q4 2017, and Q1 2018 of sales and EBITDA so that we can among other things do a good pro forma LTM sales and EBITDA?

Yes Roger we have that information and we will probably put it out to the market so.

And lastly again any sense of the uplift from the sales and EBITDA in Q2 from G-PPC?

Yes, I’m…

It’s simply in the bar chart for the acquisition…

Yes.

It’s that number, okay.

If you look at the - the contribution on the slide for Performance Chemicals.

And we’ll go to the line of Jim Sheehan with SunTrust. Please go ahead.

On the outlook for China and growth in that market, you got some new jurisdictions, new territories that are adopting early. And I think you probably had some more dialogue with your customers for that market. What is your latest thinking on what you're likely market share in China?

Jim, this is Michael. We don't comment specifically on market share. We said that historically that we did have a majority share in the Chinese market and that because of the more rigorous standards going in place that we expected share to increase. We think ultimately it should approach the share that we have in other markets around the world.

And then in terms of thinking about the future growth after the U.S. and China finish implementing their standards. Can you talk about what your understanding is, any other jurisdictions out there that might be looking at these types of vapor mission standards. You pointed to Japan and Brazil in the past, have they made any new commitments?

Yes, I guess the first one I would mention is Europe which is already passed a new regulation and will be adopting a standard that need to be in place by - I think the third quarter of 2019 Ed, I’m correct in that. In terms of the other countries that you mentioned I know in Brazil there is some regulation that’s being developed but nothing has been promulgated at this point.

And in terms of the JV consolidation, this obviously highlights the importance of your patents. Can you comment a little further and give us some more color on the patent infringement suits that you filed recently?

Yes, we became aware that the two parties in which we filed complaints against were in fact - and our opinion infringing upon our current existing patent which goes through 2022. The two cases are little bit different in the case of BASF as I believe that they were working on an activated carbon honeycomb that was intended to be part of a canister solution for the Tier 3/LEV III. And based upon patent law and our rights, companies aren’t allowed to begin to develop or market those kind of systems until patent expiration. So, in our opinion that was a bit of what we would call gun jumping. With respect to [indiscernible] it became to our attention that they actually have been producing systems some of which that are on current year model platforms that also infringe our patent. And we became aware of this by procuring those systems and testing them multiple ones of those in order to get confirmation.

We will open the line of Ian Zaffino with Oppenheimer. Please go ahead.

I know you guys mentioned some of the synergies at the G-P side and the acquisition there. Just give us an idea of may be the sources of the synergies or what kind of surprised you that there may be tracking better than expected and I have a follow-up? Thanks.

Sure, and I’ll let Mike Smith take that.

I think that we had indicated when we first announced the acquisition we had both the freight logistics savings and also manufacturing savings. So we have been able to accelerate some of those great savings and in a market where freight costs are going up and freight sourcing is tougher in fact those synergies and accelerating has been even more valuable. I’d say the other part that pat has been a positive surprise, their team has done a great job working on. With the business condition strong in both oilfield and achievements, where we would normally need to spend money externally totaling, we’ve been able to utilize some of the underutilized derivative capacity in the Crossett, Arkansas side and keep those cost internal and therefore saving money that we would have had to spend externally. So, really pleased about the accelerating those synergies into this year.

And also on the chemical side, can you just gives us an idea maybe where margin stand currently. I know you gave them for the quarter and for the six months but there is some I think mismatches with pro forma basis and non pro forma basis. So can you give us maybe an idea of where margins are in that business now on an annualized basis. And has your view of maybe I think in the past you said that you expect margins on a pro forma side to be better than 20%. I think those are your words. Where are you now again and where can that get to just given where the business is right now? Thanks.

Ian, thanks for the question and this is Michael. I am going to be consistent with what I said at the end of the first quarter based upon the post G-P acquisition and the way market dynamics have progressed that we felt that for the full year of 2018 we’ll probably realize margins that are in the 20% range plus or minus. So that’s getting us to that first hurdle that we began talking about probably two or three years ago In terms of where margin can get to if you think back to the February Investor Day that we did, that we said that over the planning horizon which goes to 2022, we thought we could drive those margins into the mid-20s.

And now that you own G-P do you feel the same?

Yes, absolutely.

We will open the line of Mark Weintraub with Buckingham Research. Please go ahead.

Congratulations on some great results et cetera. With all the noise about trade wars and in particular with China, and obviously you have an important business there, can you just provide what can cause concerns and reasons why perhaps one shouldn't be too concerned vis-à-vis your business to China?

Mark this is Michael. I think based upon the tariffs that’s been announced so far, we actually have quite little exposure, I’d call immaterial at this point. We have a couple or a few raw materials that we actually import from China that could be impacted. I think the positive thing for us on the performance material side is the fact that we have invested in China to manufacture and support the growth that we see in China. So again we don't see that’s going to have a great deal of exposure either.

And then you had a lot of success with specific acquisition that you're buying in the residual stake on the JV of the honeycombs. What sort of the M&A pipeline look like at this stage. Are you still seeing opportunities that could be of significant potential interest that could come to bury in the next 12 to 18 type months?

I would say yes, definitely. Without getting into specifics, we have an active portfolio of projects in the pipeline. We over the past 12 to 18 months really enhanced our capability for screening and due diligence on those opportunities and we are optimistic that is further value adding acquisitions that we can complete.

And recognizing you’re not going to get too specific - general areas of interest?

We are looking at things both from a chemical segment of the business, as well as the materials segment of the business. I said from beginning I think the opportunities set us this broader on the chemical side just because of the nature of our materials business but the reality is these projects that could fit into either segment. In terms of our priorities, we've always said that we look at things that are close to what we currently do or close to adjacency. Before we begin looking further filled, and that’s still the case and we're seeing a lot of projects come along that fit that criteria. So, again I think we are optimistic about the opportunities.

We’ll now go to the line of Jon Tanwanteng from CJS Securities.

Can you just confirm my math, under the New Chinese mandate that you just talked about, around 20% by January 2019, 62% by July that sounds like about 8 to 10 million cars over the whole year is that about right?

Your math is pretty good. Let me just give you a couple of other comments. First of all, we are not going to provide guidance for 2019 and what that means. I think also remember that in anticipation of its early adoption we built a significant amount of inventory and in doing so we’ve absorbed fixed cost into that inventory. So margins initially may not be as quite as high return the inventory. I think you should also remember that engines tend to be a little bit smaller in China and canisters are proportion to the engine size and the fuel tank size. And that the numbers that you're talking about is the total addressable market and we obviously have some competition in China. So I would just caveat it to be a little careful getting too far ahead of numbers and again these are estimates based on what we're hearing in the press out of China and so we’re just kind of reporting news.

And can you actually discuss the rationale behind in your new headquarter that you announced - what are the returns on that or intangibles that are provided to you guys?

Reality is Jon, we're just out of space in it. Currently today in North Charleston we have two existing facilities. Our headquarter is actually at our technical center and then we have another office that’s about five miles away. So we got our business people separated from our supply chain people and our business people separated from customer services and some other things, and so the objective here is to get everybody back into one building and the reality was that we were going to be leasing additional space one way or another. So we saw this as the most cost-effective solution. We had some significant incentives provided by the county and the state in order to locate our headquarters here and we’re taking advantage of those as part of this process. I mean, you have to realize we are one of only three public company headquartered in the Charleston region and we’re the largest by revenues, so having us here was important to the county and state. And I know that is being touted or in the press as Ingevity is building new headquarters in fact the developer is building a building and we’re going to be entering into at least for part of the space in that co-links.

And then John finally just the legal spend in the quarter that was - how much of a bump was that and does that moderate your increase going forward?

We spent about $1 million in the quarter. I think you kind of divide that over the three months and you get sort of run rate. I would tell you that it is possible that it may increase little bit and it will be pretty lumpy, right - puts and takes of this as cases proceed.

I got it. Thank you.

But - so I mean, yes it’s on our guidance Jon. So, for the year anyway.

And we have moved to the line of Daniel Rizzo with Jeffries. Please go ahead.

I'm sorry if I missed this but the growth in pavement technologies oversees in Asia and Europe was that led by Evotherm did you say?

Well it’s really led by broader suite of our products. Evotherm predominately is a U.S., North American market. So in the markets abroad, we do sell those products and we also sell probably a higher proportion of product going to pavement preservation.

And then with the Chinese 6 in 2019, is it like the U.S., in the sense that the new 2019 miles are available in the fall so we have to meet new standard by the fall, I mean it is going to work like that or am I thinking about it wrong?

It works a little bit differently Daniel, Ed Woodcock take this.

Dan its little different, obviously the U.S., follows a model year phase and requirement. Outside of the U.S. its typically done on a specific date. So China, Europe is an example, effective for Europe is an example September 1, 2019 all new vehicles need to be sold with the new standard and its likewise for China with these dates that they pick the sales of vehicles starting January 1 or July 1 of 2019 will need to be compliance with the China 6 standard, so it’s not a phase and it’s a 6 point in time.

And we move to line of [indiscernible]. Please go ahead.

So first question on your maintenance outage in the second half. Is most of the $10 million that you got is due to fact that the fourth quarter item or split to 3Q also?

It's really split across Q3 and Q4, while I would say a bit more heavy weighted to Quarter - 60, 40, 70, 30 that probably works.

And split pretty evenly between the two businesses.

And second - I am sorry if I missed that, but how much synergies you still have to realize?

We committed at the time of the acquisitions of $11 million in synergy. We really haven't updated that number but we are running ahead of the capture rate in 2018.

Lastly on this Performance Chemicals business, any more color on what you're seeing in the substitute product and if you think it could be more price hikes in the second half of this year? Thank you.

Mike, I’ll let you take that on Performance Chemicals.

So we had a very good price realization in TOFA through the first year including the second quarter and have announced rosin price increases and we believe that starting in the third quarter we are optimistic that we're going to be able to get some further price increase on rosin - rosin derivatives in the second half of the year.

In fact I guess the thing that I would add is that we've really not seen any impact because of the capacity that's come on in the hydrogenated hydrocarbon resin.

We’ll open the line of Mike Sison with KeyBanc. Please go ahead.

There has been some folks talking about order bills kind of slowing a little bit and when we think about Performance Materials and other regulatory positive that you’re seeing particularly in China. The growth rates there you should see over the next couple of years you still feel pretty good about the cadence of what you said at the Analyst Day?

Yes absolutely.

And then in terms of the ramp up in China, it does seem like that is maybe progressing a little bit ahead of schedule. Can you remind us where you at on capacity as of course I think you good to go with this one to make sure is that demand trough you have the capacity to support that growth?

It’s a great question Mike and we think we’re in great shape to support the demand that’s coming. We had anticipated that early adoption might occur and that’s unfortunately where our working capital sits where it’s today. But again as John pointed out as China starts to adopt, we’ll get the working capital back down. But we have the UI facility that is not producing anywhere near capacity today so that’s going to be the first to ramp up. We had announced in last year’s third quarter an extrusion capacity investment in Changchun that plan is looking to be mechanically complete in the first couple weeks of August. We expect it to be in producing qualified products by late September early October. Then in the first quarter call, I think we announced the Brownfield expansion for activation capacity at our Covington Virginia facility and range that in the $35 million to $40 million of capital. So we probably have one more capital investment that we will do in Covington to support this growth. That will be upcoming for approval in the next couple of quarters. It’s probably magnitude turns half of what the activation capacity project is. And then I think we’re largely done probably until we get out to the 2021/2022/2023 timeframe. Ed, would you concur with that?

Yes I agree.

And then one quick follow-up for Performance Chemicals, looks like the G-P acquisition is making really good strategic stands here, your EBITDA margin outlook longer term is even better than I think we thought initially. So, are there opportunities to help consolidate the industry I think that maybe part of the improvement is helping the best players out there. So just curious if that's something that you could do or want to do going forward?

I guess it’s something that I really don’t want to get into Mike. I mean, as you know it’s relatively concentrated industry in the U.S. There are a number of pine chemical refineries and producers in other regions of the world. But in terms of whether any of those are targets, our intention is I am going to stay silent on that.

We’ll go to the line of Chris Pash with Loop Capital Markets.

So I had some follow-ups on the Performance Chemicals business. If I heard your formal comments correctly, I think you sort of dialed up the production rates of the refineries in order to get a little bit more to address some account wins or adoption and I think you said the pavement end market. So curious so a couple things, one did that benefit your unit costs at all to help enhance the margin profile. And then also, the extra TOFA that comes along with those higher rates at the refineries did were you able to sell those without really any effect on sort of the otherwise strong TOFA pricing dynamic?

Yes, it’s a great question Chris. So first of all as you recall and as I said in the prepared remarks, we do run our refineries to rosin demand. So one of the great things that happened as we seen an increase in rosin demand part of it is coming from this application in road line striping that we referenced in the prepared remarks. But because rosin demand is up, we naturally get more TOFA production. So that's actually been something that we saw so the increase on the rosin side in terms of volume has given us more TOFA volume as increase sales in both product categories or areas. So it’s a favorable and symbiotic thing.

And what about the unit cost - intuitively it sounds like there’s some benefit there?

Yes sure. So anytime you increase capacity utilization you're going to get better absorption on the fixed costs and better flow-through of profitability and that's exactly what is occurring. I think that’s why you are seeing EBITDA margins on Performance Chemicals side that maybe a bit ahead of where we thought they might be.

And then also - since you’re ratcheting up your tour production effectively to address this application in the paving, but the seasonality to that market. So will you - is it likely that you'll adjust the other way - let’s call it in the winter when the seasonal strength isn't there for that end market?

Well two things one is - this is something that we manage every year and we will continue to run the refineries for rosin demand because we have other outlets for TOFA. And I think the thing you need to remember about pavement is that while it is TOFA based those are generally all derivatives. So the actual percentage of TOFA in the end product is much less than it might be in a different kind of application. So it’s not huge volume for TOFA.

And then just one follow-up, you passed out sort of the pro forma look of sales for the overall segment with and without the Georgia-Pacific acquisition, but what did the oil field technologies business look like in terms of growth, excluding the contribution from Georgia-Pacific that will be helpful? Thanks.

A bit of mid-teens.

Mid-teens. Got it. Thank you.

We will open the line of Jim Sheehan with SunTrust. Please go ahead.

When you guys initially provided an outlook for 2018, if you’re assuming crude oil in the range of $45 to $55 a barrel, what’s your updated assumption for crude?

The balance of the year we were sort of assuming $55 to $65, as WTI is bounced around quite a bit.

And then on Performance Materials margins, you’ve said pretty consistently that you thought those would accrete over time. Can you talk about what the upside might be from here given that we just had a record quarter for EBITDA margins in that segment?

Well I think our view continues to be that they will gradually accrete. I still think you have to look at this on a year-by-year basis or not anyone one quarter. We had a very strong quarter and that was a big jump in terms of the EBITDA margins we saw in the segment, but again I think as we saw more honeycombs which are high margin products as the U.S. gets to its next wave of adoption. As we have these assets that we put in place and we begin to run those pull-out and greater drop to the profitability. Again this is a business at 70% fixed cost, 30%, variable costs. We expect those things will contribute to higher margins.

And we’ll go to the line of Christopher Hillary with Roubaix Capital. Please go ahead.

I just wanted to ask on the narratives in China after years of and the lack of enforcement on the standards. The tables have turned and we’re seeing this much more rapid enforcement and adoption, and do you think that's going to lead to a more rapid adoption of the next standards. And could you remind us of what that benefit would look like in terms of the pollution reduction?

Yes, I think Chris it's a little premature to begin thinking about China 7 though, clearly already - they’re always looking towards the next step of regulation. Whether that's something ultimately that would look like Tier 3/LEV III in the U.S. or something in between we don't know but I accept your premise that China had gotten serious about cleaning up its environmental issues.

And are there any geographies where you are seeing a bit of a step change in the attitude towards these products?

Well as we talked about, I mean Europe is stepping up their regulation in our opinion they are going to be well behind where China is, once China adopts. So I think there is more work to be done there and really after the U.S. and Canada get to Tier 3/LEV III and China gets to what is really a U.S. Tier 2 standard, you still have basically the rest of the world with a average of mission standard that are where the U.S. was in the late 70s and early 80s. So like 50% I mean - 20% of the globe is still at 1980 kind of standards.

And there are no other questions in queue. Please continue.

Okay, Operator. There is no further questions. We certainly appreciate your continued interest in Ingevity. And we look forward to talking with you again next quarter. Have a great day.

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