Greetings. Welcome to the Ingevity First Quarter Earnings Call and Webcast. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] Please note this conference is being recorded. I will now turn the conference over to your host Dan Gallagher, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Diego. Good morning everyone. Welcome to Ingevity's first quarter 2019 earnings conference call. Earlier this morning, we posted a presentation onto the Investor section of our website. If you haven't already done so, I'd 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. For participants who are logged into our webcast, this slide should be visible in the online viewing pane and also available for download. 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 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 review the performance of our two segments. John will discuss our current financial status, our outlook for 2019 and our guidance for the year. Then Michael will make some brief closing remarks, before we open the line up to Q&A. Mike Smith, President of Performance Chemicals; and Ed Woodcock, President of Performance Materials will join the call for the Q&A section. With that, I'll turn it over to Michael.

Thanks Dan. Good morning everyone. Thank you for joining us this morning and from what we know is a very busy earnings week and for your continued interest in Ingevity. If you'll turn to slide number 4, you notice some highlights for the quarter. We had a good start to the year and our first quarter performance was in line with our expectations. We benefited from continued strong growth in Performance Materials segment and from price and mix improvements in our legacy Performance Chemicals applications. In addition, our newly acquired Engineered Polymers product line formed through the acquisition of the Capa caprolactone business of Perstorp Holding AB contributed significantly to the Performance Chemicals segment. Overall, revenues in the first quarter were $277 million, up approximately 18% when compared to the previous year's quarter. The positive revenue impacts were partially offset by higher selling, general and administrative or SG&A costs, including legal expenses and higher logistics and transportation costs. Still adjusted EBITDA were $84 million. We delivered strong revenue drop through posting a 24% increase in adjusted EBITDA on the 18% increase in revenues. The resulting adjusted EBITDA margin of 30%, which was up 170 basis points versus the prior year, was particularly strong for a first quarter. Both the drop through in profitability and the margin improvement are clear evidence of the success we're having in executing our strategy. While committed to delivering top line growth, both organically and inorganically, we remain steadfast in our commitment to prioritize earnings growth and margins, even if at the expense of some short-term top line growth. This includes investing in and building capabilities through which we can become better technology partners with our customers. But it also includes intentionally transitioning to higher margin applications, and occasionally backing away from volumes that don't meet…

Thanks, John. In summary, I think in light of some macroeconomic headwinds particularly for rosin applications, oilfield and autos, we had a solid quarter that bodes well for the rest of the year. Our Performance Materials business continues to shine. Engineered Polymers is contributing as expected and we expect our Performance Chemicals segment overall to continue to deliver earnings growth and margin accretion. We are pleased with our first quarter performance and remain optimistic about the outlook for the balance of the year. I appreciate the work and efforts of our 1,750 employees worldwide. They are a 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 up the call to questions.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Ian Zaffino with Oppenheimer & Company. Please state your question.

Hi, thank you very much. Question would be on the Capa side, I think you were building up inventory in that business. Can you tell us maybe what the impact was for free cash flow in the first quarter or maybe give us an idea of how much more inventory you might need to build up there? Just trying to get kind of a clean number there. Thanks.

Yes. I mean, look we obviously did build some inventory in preparation for Brexit, but I wouldn't characterize it as a big number. We're talking about low to mid single-digit millions at tops.

Okay.

The real issue on the cadence -- the issue on the cadence of the cash, as you guys know, I mean, our capital projects are lumpy and can be fairly sizable, right. And it's really just a timing if you look back historically, we have posted negative cash flow in this range in the first quarter. We had a pretty good quarter first quarter of last year just because there wasn't a lot of spend, but our teams have a schedule for the year, and they are executing to that. But we maintain our guidance and as you know Q2 Q3 is where we make hay.

Okay. Good. And then just touching on the ANG initiative. Can you give us an update of what's happening there? Any change in your outlook or what we should expect?

There's really not a lot embedded in our outlook for ANG, Ian, but we continue to make progress with the technology in the project. We did announce in the first quarter a pilot program with SoCal Energy in California. We also have some other pilot programs that are in development we think will be announced. So I would say even though this is still early stages, we’re increasingly optimistic that this technology is going to find its niche.

Okay, great. Thank you very much. I'll let someone else hop on.

Thanks Ian.

Our next question comes from Jim Sheehan with SunTrust Robinson Humphrey. Please state your question.

Thanks. Good morning. In Performance Materials, the 47% margin -- EBITDA margin was well above expectations. How were you able to achieve that? Maybe you could break down how much of the accretion was generated in the U.S. and how much was in China? Maybe from flowing through of low cost inventory or better fixed cost absorption at the Zhuhai plant?

Jim, this is Michael Wilson. I think it's probably a combination of things, but again largely a lot of the profitability growth in Performance Materials in the first quarter was driven by the honeycombs scrubber technology for the North American market, and those of course are among our highest margin products. So that was certainly a benefit. I think the ramp up in China is beginning to contribute as well, but the other thing you have to keep in mind is we really encourage you to think about those EBITDA margins on an annual basis not a quarterly basis. I mean, Q1 was a quarter when we didn't have a lot of outages. The same was true in Q1 of last year, where we had sort of higher than annual EBITDA margin. So compare that to the fourth quarter where we had significant outages and those things make a difference.

Got it. And can you provide us an update on your patent infringement suits in activated carbon?

Yes. I wish I had something substantive to report. Unfortunately, the legal system is moving very slowly. So it's a frustration to us. So there really is nothing of substance to report. We continue to await the court system to move forward and we continue to remain very optimistic in our position.

Great. And you talked about higher TOFA pricing. How are TOFA pricing trends into April here and what is your outlook for getting further price increases?

I'm going to let Mike Smith take that one.

Yes, well we continue to be pleased with the ongoing efforts for TOFA and we are continuing further price increase efforts. I think from a comparable basis the 18% increase over first quarter last year was very significant. We'll continue to work and see how much we can continue to get going forward and we are optimistic that we'll continue to improve our TOFA pricing throughout the course of the year.

Thank you.

Thanks Jim.

Our next question comes from Mike Sison with KeyBanc Capital Markets. Please state your questions.

Hey guys nice start to the year.

Thanks Mike.

When you think about materials, EBITDA growth was plus 21% in the first quarter. When you think about the full year either first half second half, is there some seasonality there? Will we kind of stay at this level for every quarter. Just maybe just gauge that outlook there?

Yes, I think as we sequentially move through the year that EBITDA growth should get stronger particularly as China continues to ramp and the U.S. continues to move toward the 80% adoption required for 2020 model year vehicles, but I'll see if Ed wants to add any color.

No, Michael, I mean you're dead on. We expect to see kind of a steady slope throughout the year from revenue as well as EBITDA as China continues to adopt Europe continues to adopt and the U.S. and Canada continue to add honeycomb volume.

Got it. And then just on the pro forma outlook -- the pro forma growth in Performance Chemicals in Q1 down a little bit -- down 10% in the first quarter. Do you expect that to rebound in 2Q or is the end market still kind of tough and then do you expect that to maybe do better in the second half?

Well, I think the most significant impacts on a year-over-year basis were clearly in the first quarter. So, those growth rates will look more attractive as we go sequentially through the year. Mike I don't know if you want to provide any commentary.

Yes, I would agree with that and I would say that starting the second half of the year those growth rates will become even increasingly positive.

Okay.

-- pro forma in the first quarter.

Got it. And then in terms of just -- a quick question on Capa. Where do you think you'll see the growth? It's really focused on five end markets. Are you going to see growth in all the major end markets any new products or sales synergy type growth potential in that business this year?

Mike?

Well, as we've stated the real key and focus on -- in the Capa business is driving our growth in the derivatized markets and most significant of those are polyols and thermoplastic. So, we are continuing to see strong growth in polyols for high performance polyurethane coating applications as well as adhesive applications and also in thermoplastics continued growth and penetration in bioplastic markets and so I'd say those two areas as opposed to the monomer area that will continue to be important to us but not our focus for growth such as in the more derivatized product lines.

Got it. Thank you.

Thanks Mike.

Our next question comes from Jon Tanwanteng with CJS Securities. Please state your question.

Good morning guys. Thank you for taking my questions. Within your guidance has there been any change in your global auto sales expectations given the softness in Q1. Have you incorporated any expectations or stimulus or a trade war resolution in the year going forward?

I think the answer to both questions is no. We're still looking at a North American SAAR of 16.7 million, 16.8 million in terms of total vehicles. And I think despite the really soft quarter in China in Q1, most expectations are there for the full year for sales to be virtually flat versus 2018. And then, I think in terms of the trade disputes and things like that, we've never felt those are really going to have a major impact on our business.

Okay, great. And then in terms of the products you are actually selling in China. I know that margins have been, I think less incremental given the ramp up. When do those normalize and what was your comment on the quarter if you could break that out?

I don't think we breakout the margins by country. But I would say that, in terms of the higher cost inventory that we have there that we've talked about, that we have built up during the start-up phase of that plant and taking it to full production. We expect we're going to work through all those inventories by probably sometime in the fourth quarter. So, I think once that's done, you would see a further pickup in margins related to the revenues coming out of that plant in China.

Okay, great. Thank you.

Thank you. Our next question comes from Daniel Rizzo with Jefferies. Please state your question.

Adam Bubes on here for Dan Rizzo. I was wondering if you could provide any color into your outlook for CTO input costs as well as freight charges.

What was the second part of that? CTO, oh freight charges. I think with respect to CTO, I mean it's the same as reported at the end of last quarter, we expect -- we think CTO supply and demand is relatively in balance, and we would expect maybe some modest inflation as we go sequentially through the year. I think in terms of freight and logistics costs, trucking and all shipping continues to be relatively tight. So, I think us like most other companies reporting a contingency again modest inflation there.

Okay, great. And then another question, what other regions are you guys considering an increase in fuel vapor emission standards?

Well, I guess beyond North America, China and Europe, which are all three going through meeting adoption of new more stringent standards now. We talked about at the end of last quarter that Brazil has also now moved to a more stringent regulatory standard, and eventually moving to the sort of US Tier 2 standard. I think Ed, by the 2023 time frame.

Yeah. Somewhere between 2022 and 2023, we expect to start seeing some impacts. It's a relatively difficult hurdle for Brazil to meet these new requirements, and they're going to have to re-think start a little bit early but, somewhere around that time frame and should be fully completed by 2025.

And I think it's really too early to talk about or certainly to build in any sort of outlook, but you have to recognize that all these countries that are already adopting, particularly in China and also in Europe, they are already talking about the next evolution of the standards, so.

Okay, great. And last question, could you give any color into your outlook for additional M&A. Is there potential opportunity for M&A in activated carbon potentially?

We continue to remain active in terms of managing our M&A pipeline. We think there's a healthy pipeline of projects to be evaluated, but I really can't comment specifically on where we're focused. And I'll also say that right now, our priority after the Capa acquisition is just deleveraging, but I think if the right opportunity comes along, we're certainly in a position to be able to finance it.

Okay. Thanks guys.

Our next question comes from Paretosh Misra with Berenberg. Please state your question.

Great. Thanks for taking my question. So currently what percentage of your Performance Materials business is China?

I'm not going to say that specifically, but it's still a relatively small number today. This wave of demand coming with adoption of the China six standard is just getting underway. So it will grow significantly over the next few quarters.

Okay. Got it. And then just following up on that comment on outage in the Performance Materials business. So what are your expectations for this year, would you take an outage in Q2 or would that be a second half thing?

Well, we have various outages scheduled by plan throughout the year, but I would say in general outages are weighted more toward the second half of the year for the first half, and I'm not just speaking of Performance Materials now, but across all of our plants. So I would say that outages in the second half will be a headwind to the first half, as they've been historically, maybe to a little bit lesser degree. So I would say sort of mid to high single-digit millions of dollars.

Thanks. And last one on your free cash flow guidance for the year, are you baking in working capital cash release or a neutral maybe?

I'm going to let John take that.

We're baking in a very, very modest working capital relieve to the extent it returns. I mean, as we talked about you're really going to see that inventory burn down over there in the second half of the year, right. So if there is an acceleration over above what we have planned, obviously that would have an incremental release, but it's going to take a couple of quarters to churn through that, Paretosh.

We're probably in a better position to update that cash flow outlook at the end of our second quarter call.

Got it. Thanks guys, and good luck with everything.

Thanks Paretosh.

Thank you. [Operator Instructions] Our next question comes from Vincent Anderson with Stifel. Please state your question.

Hi. Good morning. Thanks for taking my questions. So just in terms of the business shut in industrials, what exactly is the plan for that capacity now? Can you move it quickly into higher margin products or were the margins just so poor that you're happy to run at lower utilization rates while kind of underlying growth chips away at it?

No, I mean, I think longer-term, we're excited about growth opportunities in several areas including our agricultural, chemicals business and rubber applications also growth in adhesives, I guess, in line striping and things like that that I guess we count more not in our Pavement Technologies business, but as adhesives. But Mike, do you want to talk a little bit more about that?

No, I think those are some important areas, and I would also add that, if we get an improved dynamic in terms of rosin pricing, we are in a good position to increase merchant rosin and sell that profitably. But during the first quarter, we just did not find that the pricing outlook especially in export markets was sufficient enough to supply that market on a profitable basis and we would expect that as Chinese gum rosin price starts to improve, we'll be in a better position to compete more profitably in that business and grow sales accordingly.

Yes, and I would just add that we have confidence as we look forward that that Chinese gum rosin price is going to come up. It's just a matter of when not if and being able to see that visible.

That's helpful. Thank you. And then if we look back to your, I think, its $500 million EBITDA target you gave whether it was last year or maybe the year prior. Obviously, it didn't include Capa at the time, but as you look at the change in adoption rates that we've seen for activated carbon, how do you think about the timeline for that target today again excluding Capa?

Yes, we really haven't updated our long-term forecast, but it's not hard to see in the trend line that we're clearly on a path to get there ahead of 2022. I think probably what we will do is schedule another Investor Day, probably early next year and at that time we'll probably update a long-range forecast.

All right. Thank you.

Thank you. Our next question comes from Garo Norian with Palisade Capital Management. Please state your question.

Hey, guys. I just want to make sure I understand what's going on the Industrial Specialties side, I know you guys had walked away from the business. I guess last quarter you talked about kind of pro forma flattish year-over-year this quarter obviously was down. What's the right understanding of kind of incrementally what happened quarter-to-quarter in that part of the business?

Yes, well really in the prepared remarks, we talked about three significant things that drove more than 70% of that. So the first was the withdrawal from some low margin ink business particularly beginning in the second half of last year, we exited a major ink account that was in Europe that just wasn't returning margins to our expectations. So that's been a big piece of it. The other two Mike?

So the other was the reduction in non-derivatized products. So that's sort of reflective of the comments I just made on merchant rosin sale that in the first quarter of last year were profitable, but we chose not to participate in that market first quarter of this year. And then also as Michael mentioned we have begun withdrawal of a distributor arrangement in Europe, where the margins were quite low. These are more related to a sale of TOFA in Europe from another producer, and so we've begun to exit that relationship. So that was once again a very low margin side of business that we are no longer participating in but have the revenue impact as Michael described.

Okay got it. And so that's why as we progress and we start to lap that stuff things will kind of just naturally improve?

That's right.

That's correct.

Yes and look I mean again, rosin markets you know, we've talked about the success we've had in TOFA over the past couple of years of continually recovering price and getting the value for our products. Rosin markets have remained soft and it has mostly to do with the depressed price for Chinese gum rosin, which really is being oversupplied because of very high prices for turpentine. So when people harvest gum rosin, it's about 80% rosin and 20% turpentine and because of a shortage in I guess synthetically produced terpenes, there's been a lot of harvest of gum rosin that's created an oversupply. That shortage on the turpentine side has been corrected. What now needs to happen is the turpentine price needs to go back to its historical levels in which case this over-production of the Chinese gum rosin will go down and Chinese gum rosin prices should begin to come back up and that's the dynamic we're waiting to see take place.

Great. Thank you so much for that.

Thank you. Ladies and gentlemen, there are no further questions at this time. I will turn the conference back to Mr. Michael Wilson for closing remarks.

Well, thank you everyone for your time and interest this morning. Again, we remain very positive about our long-term outlook for the business and our outlook for 2019 and we look forward to talking with you again next quarter if we don't see you on the road here in the next few weeks. Thanks.

Thank you. Ladies and gentlemen a replay of this conference can be accessed at the same URL as today's webcast. Once again, a replay of this webcast can be accessed at the same URL as today's webcast. Have a great day.