Ingevity Corporation (NGVT) Q3 2018 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by. Welcome to the Ingevity’s Third Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Dan Gallagher. Please go ahead.

Thanks, Greg. Good morning, everyone. Welcome to Ingevity’s Third Quarter 2018 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 the 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 our most recent Form 10-Q. Ingevity undertakes no obligation to publicly release any revision to these projections and forward-looking statements made during this 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, the 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, as usual, 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 then review the performance of our two segments. John will discuss our current financial status, our outlook and our revised guidance. And then Michael will make some brief closing remarks before we open the line for Q&A. Mike Smith, President of Performance Chemicals; and Ed Woodcock, President of Performance Materials, will join the call for Q&A. 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 number 4, you’ll note some highlights for the quarter. As you can see and as we anticipated, we turned in a strong performance in the third quarter. We benefited from demand growth across the board. In addition, our businesses manufacturing operations are executing according to plans and expectations. Revenues in the third quarter were over $311 million, which is about 18% higher when compared to the previous year’s quarter. While volumes were by far the largest driver to the company’s financial results, price and mix improvements were solid contributors. Adjusted EBITDA was $91 million, up 25% versus the prior year’s quarter, predominantly due to the revenue impacts. We also had lower raw materials and production costs. These positives were partially offset by higher freight and distribution costs. In the quarter versus the prior year, we also experienced increased SG&A from the acquisition of Georgia-Pacific’s pine chemicals business as well as higher legal costs and costs associated with mergers and acquisitions activity. Our third quarter adjusted EBITDA margin of 29.1% was up 160 basis points from the prior year quarter margin of 27.5%. As you can see on Slide number 5, our Performance Chemicals segment posted another strong quarter. Segment sales in the second quarter were about $215 million, up more than 20% versus the prior year. The Georgia-Pacific pine chemicals’ acquisition contributed significantly to our oilfield technologies and industrial specialty sales, but did not affect our pavement technologies sales. Sales of Performance Chemicals products to oilfield customers were up over 60%, benefiting largely from the G-P acquisition. U.S. production continues to be strong despite the fact that according to Baker Hughes, the quarterly U.S. rig count was essentially flat sequentially. This reflects the efficiency the industry is seeing. With the rigs able to grow multiple wells, linear feet drills is growing much faster than rig count. On a pro forma basis, assuming we had owned Georgia-Pacific’s pine chemicals business last year, we still see revenues in the oilfield applications up approximately 20% for the full year. Sales to pavement applications increased by about 6% versus the previous year’s quarter. We experienced very strong demand growth in Europe to the tune of more than 58%, albeit on a small base. In North America, paving was moderately disrupted by weather-related issues including hurricane Florence in North Carolina. Despite these obstacles and strong – a strong comparative period in 2017, revenues in North America grew almost 2%. For the full year, we still expect growth in this business to be in the high single to near double-digit range, reflecting both the strength of our North American business and the increasing benefit of geographic diversification of our sales. Sales into industrial specialties applications and these include printing inks, adhesives, agricultural chemicals, lubricants and others were up about 22% versus the prior year period. The increase was largely driven by our Georgia-Pacific acquisition. In addition, sales in industrial specialties are also reflective of a proactive shift away from lower-margin business, such as printing inks toward higher margins in adhesives, dispersants, lubricants and rubber additives. Specifically, we recently ceded some significant volumes of low-margin rosin-based business where our pricing initiatives were met with resistance. Overall, for the segment, however, we have realized price improvement with particularly strong increases in tall oil fatty acids, or TOFA. Our tall oil rosin, or TOR, price initiatives have been somewhat successful, though limited by competitive dynamics from in-kind products. Performance Chemicals segment EBITDA of over $49 million was up over 27%. In addition to the revenue impacts, the increase was result of lower costs for crude TOR oil, or CTO, and synergies gained through our Georgia-Pacific acquisition. These were partially offset by higher freight, SG&A and energy costs in the quarter. Overall, we drove an improvement in EBITDA margins of 130 basis points to 22.8%. On a pro forma basis assuming we had earned G-P pine chemicals in 2017, our third quarter 2018 revenues increased 6%, and segment EBITDA increased about 7%. On this basis, the drop through of revenue to EBITDA was impacted by higher energy costs and mergers and acquisitions-related expenses. The integration of the G-P acquisition is ahead of schedule. Our synergy capture in the second and third quarters of this year was approximately $6 million. As a result, not only will we likely reach our committed $11 million synergy target early, we ultimately expect to surpass that number. As you can see on Slide number 6, our Performance Materials segment once again delivered outstanding performance, including posting record revenue for the quarter. Segment sales in the third quarter were $96 million, up about 13% versus the prior year’s quarter. Volumes continued to be driven by strong sales of our honeycomb scrubber products used to meet the U.S. Environmental Protection Agency Tier 3 and California LEV III standards. In addition, according to Wards, light vehicle production was up about 2%, and we continued to see the move from cars to trucks and SUVs. The split between cars and trucks moved to 28% cars and 72% trucks in the third quarter from 32% and 68% in the previous year’s quarter, respectively. As a general rule, larger vehicles have a modestly positive impact on demand for our products. Performance Materials’ adjusted EBITDA of approximately $42 million was up almost 22% versus the prior year’s quarter. This translated to a 43.2% adjusted EBITDA margin, which is up 320 basis points from a year ago. This was driven by the strength in honeycomb sales, improved price and product mix and very strong performance at our manufacturing facilities. These positives were partially offset by growth-related costs and increased legal expenses necessary to defend our intellectual property. As you know, turning to Slide 7, our Performance Materials business is benefiting significantly from advancements in global regulations related to gasoline vapor emission control. We are continuing – we are seeing continued strong demand for our technologies designed to be U.S. EPA and California Tier 3 LEV III regulations. As you may know, we are currently in a plateau year according to the implementation schedule. As a result, growth has moderated in comparison to the previous years. However, automakers are continuing to gradually increase the percentage of compliant vehicles as model platforms are revamped. The regulatory implementation schedule next steps up to 80% compliance for the 2020 model year platforms beginning in the second half of 2019. China, as previously discussed, is implementing a national China 6 regulation, which will require U.S. Tier 2 type systems on all new gasoline light vehicles in the country by mid-2020 Last quarter, we outlined public announcements made by the State Council in various regions and cities to implement this standard early, and many regions and cities are poised to do just that. More recently, the Hebei Province has adjusted its time frame to align with the state Council directive and has effectively pushed out their still early adoption by six months, shifting from January 1, 2019 to July 1. The city of Beijing has also pushed out their timeline by six months shifting from July 1 of 2019 to January 1 of 2020. This reduces the announced January 1 early implementation from approximately 20% to approximately 10% of new gasoline vehicles based almost solely on the Hebei shift. The Beijing move is de minimis based on the number of vehicles. Ultimately, even with these shifts, the percentage of announced early adoption by July 1 of next year remains approximately 60%. Notably, we began this month to shift activated carbon products in response to meeting demand from early adopting regions and carmakers in China. It is our intent to continue to pass along any announced information that we are aware of regarding the early adoption timing each quarter. That said, we expect the overall implementation will be fairly bumpy. Lastly, the European Union has begun to implement its Euro 6d regulation. Though the regulation call us for compliance by September of 2019, we have already begun to make shipments in response to the new standard. In addition, gasoline vehicles share is increasing Europe as diesel rapidly declines. In fact, according to the European Automobile Manufacturers Association, diesel’s share in Europe has decreased to 37% from 46% a little over a year ago. We’re confident that our technological leadership and the investments we made in manufacturing capacity globally will serve us well as these countries implement these regulations. Interestingly, when combining the U.S., Canada, China and the EU, we estimate that approximately 70% of the world’s new gasoline vehicles have shifted or are in the process of shifting to more stringent evaporative emission standards, which we believe will be a key driver of our growth going forward. At this point, I’m going to turn the call over to John Fortson, our Executive Vice President, CFO and Treasurer, for a more detailed review of our financial status and our guidance for 2019. John?

Thank you, Michael. Good morning, everyone. There are three areas I will cover. First, I will provide some additional color on financial performance in the quarter and over the nine months of the year-to-date. I will review our cash generation and capital structure. And last, I’ll review and provide some additional details on our revised guidance. As Michael mentioned, the third quarter as well as performance in the first nine months of the year has been strong operationally in both segments. As you can see on Slide 8, revenues of $311 million in the third quarter and $855 million for the nine months year-to-date were up 18% and 15% each from their prior year period, respectively. These sales numbers reflect growth in both of our segments. Adjusted EBITDA of $91 million and $247 million for the third quarter and nine months, respectively, are up 25% for the quarter and up 30% from the first nine months of 2018 when compared to last year. Margins improved in both measured periods. Third quarter adjusted EBITDA margins increased 160 basis points compared to the prior year quarter and 330 basis points when compared to the first nine months of the prior year. For the nine months, our consolidated adjusted EBITDA margin was 28.9%. Performance Chemicals sales were up 17% over the nine month year-to-date when compared to last year. Performance Chemicals EBITDA has grown 21% over the same timeframe and margins were up 360 basis year-to-date to 21.3% versus 17.7% in 2017. This margin expansion is attributable to stronger pricing and higher-value products, but also importantly reduced costs principally in TTF. Performance Materials sales were up 12% over the nine months year-to-date when compared to last year. Performance Materials EBITDA has grown 21% over the same time frame and margins were up 350 basis points year-to-date to 43.9% versus 40.4% in 2017. For the third quarter of 2018, we recorded net interest expense of $8 million. Our provision for income tax this quarter was $16 million and $40 million for the year-to-date. The GAAP tax rate for the quarter was 24% and year-to-date was 22%. We reported net income attributable on the quarter of $49.5 million and diluted adjusted earnings per share were $1.16. We have $42 million basic and 42.7 million diluted shares outstanding as of September 30. During the three months ended September 30, we repurchased approximately 94,000 shares of our stock at a weighted average cost per share of [indiscernible] On Slide 9, you’ll find some cash balance sheet and cash flow information. As of September 30, our net leverage ratio was 2.1 times. Total debt was $756 million, including our capital lease obligation amount of $80 million related to Wickliffe IDB. We finished the quarter with $71 million of restricted cash for the IDB, and additional cash and cash equivalents of $58 million. Net debt was $628 million. As of September 30, $748 million of our $750 million revolving credit facility is available to us. We are currently borrowing in that facility of LIBOR plus 121 basis points in our new revolver and term loan. Trade working capital increased this quarter to $226 million due to increased sales and the payables and receivables that go with them as well as the seasonality of our business. Underlying these numbers, we continue to build inventory in Zhuhai to address the growth demands from China. These increases in the Performance Materials segment have been partially offset by strong inventory and capital management in the Performance Chemicals segment. Cash from operations year-to-date is $166 million. Our capital expenditures were $56 million over the same time period. Year-to-date, we have generated $110 million of free cash flow. Additional information will be available in our 10-Q, which we expect to file on November 2. Turning to Slide 10. As we finished 2018, we are tightening and raising the new point of our guidance for our adjusted EBITDA guidance to between $306 million and $314 million. During the fourth quarter, we expect continued momentum in our Performance Chemicals segment. Recognizing that it is a seasonality lighter quarter and particularly for our pavement technologies markets. Additionally, while we have conservative expectations for vehicle production in the fourth quarter, as OEMs typically take downtime, we also have significant maintenance outages in both segments this quarter, including a major kiln replacement in our Covington facility. We continue to work to review and improve our tax position globally. We expect to finish the year with an adjusted effective tax rate between 22% and 24%. Our guidance regarding capital expenditures has increased modestly as we continue to invest for growth in our Performance Materials segment. We now expect capital expenditures to be $90 million to $95 million for the year. Yet, we are increasing our free cash flow guidance to between $120 million and $130 million to reflect the strong operating performance of our segments, adjusting for some increased maintenance expenditures this quarter. We continue to expect to finish the year with net debt-to-adjusted EBITDA of about 2 times. As we look forward, we are focused on execution across the company as we prepare to meet the opportunities in 2019 as China 6 is implemented and the next step-up in the U.S. regulations to 80% of vehicles being Tier 3, LEV III compliant is required. Additionally, we continue to take advantage of favorable market conditions across the Performance Chemicals end markets to drive price and mix improvement. I will now turn the call back to Mike.

Thanks, John. In summary, we expect to finish the year strongly and in line with our expectations. In all, we anticipate that 2018’s results will reflect another great year for Ingevity. I appreciate the work and efforts of our 1,600 employees worldwide. They are a distinct competitive advantage for us. We continue to believe very strongly and long-term potential of our company, and we hope you share our enthusiasm for Ingevity. At this point, operator, we’ll open up the call to questions.

[Operator Instructions] Your first question comes from the line of Mike Sison from KeyBanc. Please go ahead.

Hey guys, really nice quarter there. So just in terms of your outlook for the fourth quarter, if you take the midpoint, yes, we would assume that EBITDA growth actually accelerates in the fourth quarter year-over-year versus the third, which would be pretty impressive. So given a lot of companies are struggling here, maybe talk about what’s going to drive that growth in the fourth quarter and maybe a little bit of color on each of the segments?

Thanks, Mike. And you’re correct in terms of the continued EBITDA growth in the fourth quarter. I think the big picture is this is a continuation of the trends that we’ve seen. We expect ongoing volume growth on the Performance Materials side led by our honeycomb products for the Tier 3, LEV III. Obviously, we’ll begin to pick up a little bit of volume from early adoption in China, as those orders are now starting to be placed. And I think on the chemicals side, as I talked about in the prepared remarks, we’ve got continued strong growth in oilfield, which we expect to finish the year strongly. Little hard to predict on pavement technologies business and that we’re sort of now in the fourth quarter so we are not in the North American paving season. But maybe a little bit of catch-up work that got pushed out of the third quarter due to weather-related issues, hurricanes included, and hopefully some ongoing strength in other geographies there. But, I mean, I wouldn't point to any one thing. I just think that overall it's the trajectory of the business.

Great. And then just need a little bit of color on China? I guess, with what has been said, what type of growth do you think that provides you in 2019 roughly, and then, I guess, with the 2020 U.S. standards coming in, that is a bigger 2019 impact as well, correct?

That's correct. We should see significant impacts from increased regulatory adoption both in China and the continuation of what's been happening in the U.S. and Canada. I think in terms of China, it's fairly calculable. I mean, as I indicated again in prepared remarks, we now expect that beginning in January, provinces, cities, regions that account for about 10% of new vehicle sales are scheduled or announced to adopt. And by the second half of 2019, should be 60%, so beginning on July 1 time period. If you take that, multiply that across $25 million-or-so gasoline-powered, light-duty vehicles in China and make some assumptions around share, you can calculate the impact. I think we previously said that in going from the current standard to this Tier 2 life standard sort of the pickup in revenue is $5 to $6 a vehicle. So that's pretty significant. I guess, the comment I would make around the U.S. is that this was a plateau year, 2019, in terms of no step-up in the required regulatory adoption. It does step-up for 2020 model year vehicles, which extensively would begin rolling out mid-year next year. But I think what we're more seeing is rather than sort of a pause and then a step function change by the automakers, they're simply going ahead and as they update model platforms, they're changing the technology. They're moving to the new cannister so. I think what we may see is a more gradual sort of incline of growth.

Great. Thank you.

Your next question comes from the line of Jon Tanwanteng from CJS Securities. Please go ahead.

Good morning, gentlemen, very nice quarter. Just a quick question on China and the ramp there. Are you in an over inventory position at all now as Hebei is pushing back its adoption date? And has that changed the production plans for Q4 and Q1 in the use of cash and working capital?

As far as I'm concerned, we've been in over inventory situation for a while. But it's been quite intentional to prepare for the demand that's coming. So there is nothing that's changed here. That's going to change probably our production schedule. If anything, it gives us a little more breathing room, quite frankly.

Okay, great. And then just if you know, why did they push out and is there a risk of any other provinces either pushing out or pulling in compared to what you think right now?

Well, as I said, I mean we think overall the whole thing is going to be a bit bumpy. One of these was to get aligned with State Council. The other was maybe just because they could. Ed Woodcock, I don't know if you have any color on that.

Yes. The Hebei Province, that pushback by six months was just to align with State Council. Beijing pushed back six months as well, not from the State Council directive, but I think more just to give their OEMs a little bit more time to respond to the change.

Great, thank you. And then final question. Just given the recent volatility and input prices and tariffs in all the things that are going on in the end markets. Can you talk about your cost position relative to other players in the pine chemical industry and people you can – you compete against? Are you seeing increased competition? What's sort of different about your cost position and is that sustainable?

Well, I think we're very well positioned from a cost standpoint. I think if we turn the clock back a couple of years, we were bit dislocated on cost because of the situation with CTO. But our CTO prices have been coming down, moving toward market. That's been a tailwind for us, and I think by the time we get to the end of 2018, we'll basically be at market. So I think that's been a real positive for us. But I just think the activities that our team has had to be continue to be focused on cost-effectiveness. The increases in capacity utilization with volume have served as well. So, Mike, I don't know, if you would provide any additional color on that?

No, I think that's a good summary. We're certainly keeping a very close eye on any other additional cost inflationary pressure and seeking hard to pass that on through price increase wherever we can.

Great, thank you very much.

Your next question comes from the line of Jim Sheehan from SunTrust. Please go ahead.

Good morning. Could you talk about conditions in the pine chemicals industry today? There was a major outage at a competitor. How do you think that outage might affect the market and maybe pricing for either TOR or TOFA?

Good morning, Jim. So first of all, our hearts go out to everyone who was impacted by the hurricane. Living in a hurricane zone ourselves we understand that and having had a couple come our way in the last couple of years. But I would say to date, we haven't seen any meaningful change in order patterns or the order book as it related to impacts to the pine chemicals industry. I think to some degree it's all going to depend upon how fast capacity is brought back up. I think there could ultimately be some impact near term on CTO availability in terms of the fact if a lot of trees or forest lands were taken down. Those trees as they go down can still be used for making pulp. However, the CTO can degrade fairly quickly. So it's really hard for me to assess that at this point. I don't really have any reports in terms of sort of down timber or down forest lands as a result. But if anything, I think it all could result in some tightening of market conditions.

Also on the pine chemical pricing environments for completing chemistries, can you talk about what you're seeing there? And if you see any impact, positive or negative, on pine chemical pricing?

Yes. No, we always try not to overplay the correlation, but we do talk a little bit about Chinese gum rosin. I think if you look at Chinese gum rosin prices, they do change seasonally. We just came out of the harvest season. I think spot prices in China were a bit lower in 2018 than 2017. But if you, kind of, look at the full year average, Chinese gum rosin prices have moved up over the past year or so. So generally a positive. We're not really tied to the spot market at all, quite frankly. So I don't give much consideration to that. I think in terms of hydrocarbon resins, we've talked about that. Hydrocarbon resin prices have come up because oil prices have gone up. And they're obviously tied to the petrochemicals supply chain. But again there is sort of very little direct competition than we have with hydrocarbon resins. If I think about the other fats and oils that TOFA would compete with, palm oil has been something that has sort of depressed pricing for the past year. But again these other fats and oils are really more regional plays. Palm oil would be the very last thing we would compete with just because of the margin profile and typically it's sort of in-region demand and it's not a region where we have a lot of revenue or a lot of volume. So I don't see major issues associated with that.

Great. And on the activated carbon business in China, could you talk about what your expected market share might be now that we're getting closer to implementation?

As you know Jim, that's not something I may be very specific about. I would say we settle along that the more stringent regulations require higher performing, more demanding product that tends to favor our product line, and we do expect that our share will increase in China. We think significantly as this adoption plays out, and I think we talked about that previously. That all plays to our favor. And we've got more than, we believe, 80% of product selections that have been made. So knowing what the OEMs have chosen gives us confidence in our outlook.

Thank you.

Your next question comes from the line of Ian Zaffino from Oppenheimer. Please go ahead.

Hi, guys. This is Mark on for Ian. Thanks for taking our question and great quarter. So you guys mentioned that the synergies with GP are tracking as per the schedule. So I just wanted to dig in a little bit more on which areas are outperforming expectations? And then going forward, which areas are going to help you guys surpass the $11 million of synergy targets. Thank you.

Mike, you want to take that?

Yes, sure and thanks, Mark. I'd say that overall our efficiencies and synergies for transportation and production have been fairly much in line, but we were able to accelerate those. The part that has been sort of an additional increase specifically for this year is better efficiency in SG&A than we had originally expected. So that's been one of a key accelerant. And as the teams have really been able to work through the detail, they're doing a great job in executing them as quickly as possible. And in fact, in the third quarter, we were able to use our additional three-plant network to start reduce external tolling costs, which really brought that forward.

Okay, great. That's very helpful. And then just a quick one on M&A. How does sort of the pipeline look like going forward? Are there any particular areas of interest? And where you guys see the greatest opportunities given just sentiment of end markets for you guys?

We continue to have an active pipeline looking at a lot of different opportunities. As we talked about, we sort of beefed up our capability to do that over the last 18 to 24 months. We continue to believe there are opportunities that are on the specialty chemicals side as well as materials side. We have always said we thought the opportunity set was a bit broader in chemicals. Of course, we really can't get into any specific things that we're looking at, at this point.

Okay, great. Thank you guys very much.

Your next question comes from the line of Roger Spitz from Bank of America. Please go ahead.

Thank you very much and good morning. On the outage costs, can you give any guidance on the amount of EBITDA impact for each of the two outages in the two segments?

Yes, John, you want to comment on that?

Yes, sure. Yes, look, we – I would tell you that similar to the outage that we experienced two years ago, in our math, it's sort of mid to high single-digit costs for the outages.

In total?

In total, yes. I think across Q3 and Q4 versus the first half of the year. And I would say about 70% of the costs are Q4 versus 30% in Q3. And we had DeRidder and Wickliffe down in Q3, and now we're going to have Charleston, Covington and Crossett all down in Q4 so – with a big outage in Covington.

Your next question comes from the line of Daniel Rizzo from Jefferies.

Hi, guys. Just in terms of timing. So the China implementation starts midyear and U.S. is with the 2023 models that are shipping in midyear. Would that suggest that you have to ship a few months prior to that? How does it work with what you guys produce versus what – when the cars are produced? What's the way, I guess.

Yes. So for China, it's not based upon model year. It's based upon an implementation date. And again per the national regulation that date is July of 2020, but there's a lot of early adoption going on. So we've talked about what those percentages are. And typically, it's typical automotive supply chain. So we're going to get orders probably eight to 10 weeks ahead of when they want or – the product in order to manufacture or produce the vehicle. So – and look, I know that we've talked about some changes around two provinces in China and I've given you some percentage changes in terms of vehicles, but if I put that in perspective for you, again, the big province in terms of vehicles that's impacted is Hebei. Hebei is about 2.4 million vehicles. So if they're moving from implementation in January to July, you're talking about an impact over the course of 2019 of maybe 1.2 million vehicles that have been moved out to a later year. And we talked about the fact that it's $5 to $6 of incremental revenue per vehicle. So that pretty much gives you what that impact is. Not very significant, in other words.

Right. And then you mentioned that what was the Beijing date because they could because – and also to give their OEMs more breathing room. I guess, and I don't know if you can answer is, what are the chances that happens for the remainder of the country that's not adopting early? I mean, is there chance that it's pushed up beyond mid-2020 by the Chinese national government whoever national regulatory agency?

I think it's less probable that the national target date will be moved out. I think it is more probable that we will see continued movement by cities and regions as they look to adopt. So then – and we're just going to – all we're trying to do is not be predictive but report what we know and what we see in the China press, and we will continue to do that.

Thank you, guys.

Operator Your next question comes from the line of Chris Kapsch from Loop Capital Markets. Please go ahead.

Yes. Just a follow-up on the China discussion, not to belabor it because as you pointed out in the grand scheme of things moving around a couple million vehicles two months or so isn't really the story given it's really more about 100% adoption and step change in content per vehicle. That said, can you – maybe I missed it, but can you explain why is it that there was a little bit of slippage by a couple of jurisdictions? Was it – is it just a sheer challenge associated with – logistically for the supply chain to shift or something else?

Yes. Chris, I think we answered it earlier in the call. But in the case of the Hebei Province, they were just aligning with the State Council's directive. In the case of Beijing, as Ed pointed out, I think it was just an opportunity to give the OEMs a chance to be more fully prepared for implementation.

Okay. And in Europe, the 6d regulation, now obviously, that's a lagging sort of standard. But curious as to migration happens to that standard, is there any inherent performance advantage that your products have to meet that standard vis-a-vis the legacy standard in Europe? Just wondering if this is an opportunity for subtle market share even though that's a small market at this point? And then also in Europe, there is – you've hinted at the possibility that – especially given the transition away from some may say that the death of diesel, right, that they may look at having a much more progressive how lagged their current standards are in terms of evaporative emissions in conventional gasoline vehicles?

So let me make a couple of comments, and then I'm going to pass it over to Ed. So first of all, because it is a more stringent standard, I think any time that's the case, it tends to favor our products. So that much is true. I think the second thing is Europe is really taking a relatively small step, right? They're going from capturing essentially one day of parking emissions to capturing two days. We still believe there is future opportunity. We just don't talk about it because we wait for the regulations to get promulgated. But I think it's entirely plausible that Europe will continue to increase its regulatory standard. Now having said that, one of the things I want Ed to comment on because he can provide better color is, we've talked about the fact that the Euro standard has a target adoption date of 2019, I mean, September of 2019. You should be asking yourself why we're already seeing a revenue associated with that. So I want Ed to give you a little bit of color on how that regulation works.

Yes, thanks, Michael. In general, there is really no standardization globally of how they implement. We've obviously talked about the U.S. implements on a model year basis and it allows the OEMs to phase in based on model year updates. China, as Michael talked about earlier, is picking a specific date and time for vehicles to be at that regulations requirements. The way the European Union works, it's a registration date. So think of the Euro 6d regulation, it's required to be in compliance by September of 2019, but that individual owners of vehicles registering vehicles by September 2019. So those Euro 6d compliant vehicles have to be in inventories of vehicle lots and able to sell at least three months prior to that implementation date or the registration date of September 1. So we are seeing demand today, and I would expect that demand to continue through easily three months or prior to that and at that point, we would expect most of the vehicles to be meeting Euro 6d compliance ahead of that September 1 registration date.

That's helpful. Any comments on conversations early as they may be – that you might be having with the regulatory agencies there on something more stringent than 6d?

I don't think there is anything substantial to report. I mean, I don't want to get into conversations that we may or may not be having. So – but we are active globally, helping various administrations and countries meet their environmental issues and helping automakers comply with those.

Okay. Thank you.

Your next question comes from the line of Paretosh Misra from Berenberg. Please go ahead.

Great, thank you. I got a couple of questions. So in Performance Materials, the dollar per vehicle in China of about $5 to $6 or so. Does that change with exchange rate or it's denominated in dollar?

Well, I think we have manufacturing facilities in China. We have our facility in Zhuhai. We are also currently bringing up our extrusion facility in Changshu, which is just outside of Shanghai. Our ability to manufacture locally and sell based on RMB costs, I think, we're going to take a little bit of that issue with exchange rate out. Obviously, translating it back into the U.S. is where we may see some impact. But the – our expectation for the RMBs seems to be relatively stable for next year.

Yes. I got it. And then the second, I wanted to go back to the pine chemicals feedstock cost. So obviously, you're benefiting from the changes in the contract, but just in terms of the market price of CTO, how is it looking now versus, say, last year? Like any color you could provide would be great?

Yes, I think the overall market is in balance from a supply-demand standpoint as we enter into 2019. And clearly, as we get to our fourth quarter call, we'll update our guidance for the company as also as well some of these issues around raw materials et cetera.

Okay, great. Thank you.

And at this time, there are no further questions.

Okay. Well, thank you very much, everyone, for your time and interest this morning. We remain very positive about our long-term business outlook, and we look forward to talking with you again next quarter. Take care, and have a great day.

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