Earnings Labs

Ingevity Corporation (NGVT)

Q2 2020 Earnings Call· Sun, Aug 2, 2020

$74.75

-2.06%

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Transcript

Operator

Operator

Hello, and welcome to the Ingevity Second Quarter 2020 Earnings Conference Call and Webcast. At this time, all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Jack Maurer, Vice President, Public Affairs and Investor Relations. Jack, please go ahead.

Jack Maurer

Analyst

Thank you, Kevin. Good morning, everyone. Welcome to Ingevity's second quarter 2020 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 & Presentations. For participants who are logged into our webcast, the slides should be visible in the online viewing pane and also available to 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 the 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 Rick Kelson, Chairman of the Board and Interim President and CEO; John Fortson, Executive Vice President and CFO; Mike Smith, President of Performance Chemicals; and Ed Woodcock, President of Performance Materials. First, Rick will comment on the highlights of the quarter and discuss some of the recent cost reduction actions we've taken in light of the economic impact related to the coronavirus or COVID-19. Then, Mike and Ed will review the performance of our two segments. John will discuss our current financial status and our reaffirmed annual guidance. Rick will offer some closing thoughts. And then, we'll open up the call for Q&A. With that, I'll turn the call over to Rick Kelson.

Richard Kelson

Analyst

Thanks Jack, and good morning, everyone. Thank you for joining us this morning. We appreciate your interest in Ingevity. If you turn to Slide 4, you'll note some highlights for the quarter. Ingevity delivered second quarter financial results in line with the special one-time guidance we provided at the end of the first quarter. And looking forward, as John will discuss later, we are reaffirming our fiscal year 2020 guidance. During the quarter, our team remained focused and implemented a series of cost reduction initiatives to bolster second quarter profitability, while at the same time, continuing to conduct business despite the constraints of the economic impact of the coronavirus or COVID-19. Overall, revenues in the second quarter were $271 million, down 23% when compared to the previous year's quarter. This was slightly better than our second quarter guidance. Similar to most companies, we experienced lower volumes attributable to weakened demand associated with the coronavirus. The downturn in automotive sales and production in North America and Europe during the quarter significantly reduced our revenues for our automotive activated carbon products. This was partially offset but an upturn in demand for similar products in China. Reduced demand in industrial specialties applications such as printing inks and volatility in the oil field drilling and production industry also contributed to the revenue decline. With respect to earnings, adjusted EBITDA were $67 million, down 38% from the previous year's quarter. This was within the range of our guidance. We experienced an increase in production costs due to the reduced throughput, driven by lower volume. However, we more than offset this with a series of cost reduction initiatives that I'll review in just a minute. Our adjusted EBITDA margin for the Company was 24.8%. For the quarter, we generated solid free cash flow of $34 million.…

Michael Smith

Analyst

Thanks, Rick. In Performance Chemicals, sales to all of the end-use applications declined due to COVID-19 economic impact in varying degrees. We saw comparatively reasonable strength in pavement technologies and engineered polymers, partially offset reduced demand in industrial specialties and oilfield technologies. Overall, segment sales in the second quarter were $186 million, down 19% versus the prior year period. Sales to pavement technology applications were about even with the prior year. Paving season in North America is progressing largely unaffected by the economic shutdowns. Projects planned by the majority of State Departments of Transportation are generally proceeding as planned and progressing on schedule. In addition, we realized a sales increase in EMEA, which was partially offset by decreases in India. Sales for the engineered polymer product line were down somewhat due to reduced industrial demand, predominantly for caprolactone monomer, particularly in Europe. At the same time, we have seen increased demand for thermoplastic for bioplastic applications. We continue to move toward high-value derivatized polyols and thermoplastics in this business. In fact, in the quarter, polyols and thermoplastics accounted for approximately 80% of engineered polymer revenue. Margins continue to remain strong. And given our raw materials petrochemical linkage to benzene, we are realizing some cost benefits due to lower input costs. Sales decreased in industrial specialties applications, and these include printing inks, adhesives, agricultural chemicals, lubricants and others, were down about 24%. Sales in this area were affected by weak demand in industrial markets, especially for printing inks, as printed advertising declined due to the coronavirus-impacted retail industry. And for the last quarter, revenues were down due to the exit of an unprofitable distributor agreement in the year ago period. We also continued to experience pressure in our tall oil rosin prices from supply of alternative materials, particularly low-priced Chinese gum…

Ed Woodcock

Analyst

Thanks, Mike. Turning to Performance Materials, as you can see on Slide 8, revenues for the segment were down 31%. Shutdowns by automakers in North America and Europe resulted in significantly lower volumes in the quarter. The decline was partially offset by rebounding automotive business in China. China's automotive pellet sales in the second quarter were the second highest on record, reflecting the strong demand rebound and the implementation of the China 6 standard, which is essentially completed. Overall, we saw significant demand late in the quarter, which enabled us to finish the period strongly. We believe this bodes well for the rest of the year. Segment EBITDA were $23 million, down 53% versus the prior year period due to the sharp downturn in volumes and the resulting decrease in production throughput. These were partially offset by decreased plant spending, furloughs at several Performance Materials manufacturing facilities and reductions in SG&A costs. Segment EBITDA margins decreased 1,240 basis points to 27.6%. This significant fall reflects the high fixed cost nature of this business. It's important to note that this fixed versus variable cost ratio benefits us greatly in normal conditions. But by the same token, they fall equally hard in a difficult environment. From an operations perspective, our US carbon plants and honeycomb scrubber plant in Waynesboro are running normally. Our plants in China are running on reduced shifts in order to reduce some inventory. We have maintenance outages planned in Wickliffe, Kentucky and our plant in Zhuhai, China in the third quarter. And we'll be completing the last of four kiln replacements in Covington in the fourth quarter. With that, turning to Slide 9, I'd like to talk a little bit about current conditions in the global auto industry. China has had an amazing rapid V-shape recovery to their…

John Fortson

Analyst

Thank you, Ed. Good morning, everyone. I will provide some additional color on our second quarter results, review our capital structure and discuss our reaffirmed annual guidance. Turning to Slide 10, as Rick, Mike and Ed have covered the revenue and EBITDA of the Company and its segments, I will begin at the SG&A line of the income statement. SG&A is down 19% versus previous year, reflecting the initiatives that Rick discussed at the beginning of the call. On a percentage of sales basis, our total SG&A is up 70 basis points. And our core SG&A, excluding amortization of $8 million included in SG&A from the acquisitions, was down 20 basis points as a percentage of sales. Net interest expense for the quarter was $10 million, which decreased almost 24% year-over-year. The provision for income taxes on adjusted earnings was $7 million for the quarter. Our adjusted tax rate for the quarter was 21.1%. We continue to expect that our fiscal year 2020 estimated cash tax rate to be in the range of 22% to 24%. Diluted adjusted earnings per share were $0.63, down 54% from the quarter a year ago. We did not repurchase any shares in the quarter, and approximately $407 million remain available for repurchases in our current authorization. Free cash flow was solid at $34 million, down 32% versus the prior year's quarter. Given the current economic conditions, we believe this is a solid outcome in the second quarter. Turning to Slide 11, you'll see our current capital structure. Our borrowing rate at the end of the quarter for our revolver was LIBOR plus 150 basis points. And the borrowing rates of our term loans are LIBOR plus 100 basis points and LIBOR plus 150 basis points. Of the term loans, $166 million has been hedged…

Richard Kelson

Analyst

Thanks, John. These are most certainly very unprecedented times from a business standpoint. That said, we are generally pleased with our performance, all things considered. More importantly, given our track record on guidance and meeting guidance, as John said, we continue to have cautious optimism and confidence in our guidance for the full year. Longer term, we believe we are well positioned for value creation. As a market-leading global specialty chemicals company, we continue to leverage our technical expertise to the benefit of customers. Combined with a strong balance sheet and experienced management team, we believe that the soundness of our strategy and our sharp execution warrants continued investment in Ingevity in the long term. In closing, I appreciate the work and efforts of our 1,850 employees worldwide. They are a distinct competitive advantage for us. We continue to believe very strongly in the long-term potential of our company. We hope you share our enthusiasm for Ingevity. At this point, we'll open the call up for questions.

Operator

Operator

[Operator Instructions] Our first question today is coming from Jim Sheehan from SunTrust. Your line is now live.

Jim Sheehan

Analyst

Thank you. Good morning. Could you comment on Performance Materials EBITDA? What was that for the month of June? Or what was the run rate exiting the quarter?

Ed Woodcock

Analyst

Yes. I think, Jim, we exited kind of at our normal margins. And so, it gives us again strength of looking at the back half relative to volume getting back into our plants.

Jim Sheehan

Analyst

Thanks. And on engineered polymers, really stronger results than I was expecting there. You talked a little bit about some of the drivers. But could you provide more color on that? Why are the end markets doing so well in some of the bioplastics, etcetera? And what's your outlook for continued tailwinds from lower benzene costs going forward?

Michael Smith

Analyst

Yes. Sure, Jim. This is Mike. Well, as I mentioned, we did have some pretty significant growth in the bioplastics market, which is an area that we've really been working on developing with our customers. So, that's positive. We were having to face a lot of both industrial headwinds. So that's tough. And we also have a pretty significant presence in footwear, and not a lot of footwear being sold of late. But with the advancements we're making with new applications with customers and how they are introducing products, the engineered polymers business line is progressing pretty well and especially the growth in bioplastics for our thermoplastic product line.

Jim Sheehan

Analyst

Terrific. And could you provide any update on your intellectual property lawsuits? Has there been any developments on the honeycomb scrubber patent lawsuits?

Ed Woodcock

Analyst

Yes, Jim. This is Ed. No changes since the webinar. We're still scheduled trial with BASF in September. But as we kind of discussed, we expect that to be delayed because of the COVID-19 issues.

Jim Sheehan

Analyst

Thank you very much.

Operator

Operator

Thank you. Our next question today is coming from Ian Zaffino from Oppenheimer. Your line is now live.

Ian Zaffino

Analyst

Great. Thank you very much. Let me say [indiscernible] held in there. Can you may be give us a sense of what your visibility is there as far as the continued strength? And then also, kind of your view as -- once projects that were already in the works, once they roll off, what's the appetite to resume new projects? Will we hit an air pocket? Or do you think we'll just kind of seamlessly see it rolled over into new projects? Thanks.

Michael Smith

Analyst

Sure, Ian. As I mentioned, to date, we're seeing our pavement business hold up really relatively strongly. And projects for the third quarter seem to be very much on track. I think that in terms of the funding levels that especially gets related to the states and their budgets for gasoline, I think for this year, we're going to continue to be in pretty good shape. I think it really becomes a matter of what sort of happens as we go into next year. And we really -- it'd be hard to have a lot of visibility on that. There's a lot of talk about significant infrastructure investments, which would clearly be a very nice tailwind. A lot of communities in states certainly want to continue with infrastructure and paving, and we hope that remains going forward.

Ian Zaffino

Analyst

Okay, thank you. And John, you said that you would look for M&A. Is that correct? Were those the words?

John Fortson

Analyst

No. I think we're -- look, we're focused on debt reduction right now. You can never really, Ian, stop, right, because you don't always control when different assets come to market. But just given the broader macro drop and the uncertainty in financing capabilities, etcetera; it's not at the top of our list right now.

Ian Zaffino

Analyst

Okay, great. Thank you very much.

Operator

Operator

Thank you. Our next question today is coming from John McNulty from BMO Capital Markets. Your line is now live.

Unidentified Analyst

Analyst

Hey, good morning, guys. This is Colton [ph] on for John.

Richard Kelson

Analyst

Hi, Colton.

Unidentified Analyst

Analyst

So, I guess -- the first question I had is, I believe the Tier 3 products that you sell into the North American market in Performance Materials are a little bit higher margin than some of the Tier 2 products. So, I was just wondering -- with North American auto production down almost 70% in 2Q and that kind of going into just down low-single digits in 3Q and 4Q, I was wondering how much of that margin mix impacted margins in 2Q and how that will progress going forward?

Ed Woodcock

Analyst

Yes. This is Ed, Colton. I'd say, our bigger issue was around our production facilities. We basically decided to take all the pain in Q2 relative to operating our facilities. And these facilities -- the activation facilities, you can't turn them down. It's binary. They're either on or off. And for our activation facilities -- so, that would be the Covington facility, the Wickliffe facility in the US and the Zhuhai facility in China -- those facilities were down for over half of the quarter. But this has set us up to run our facilities, US facilities through the back half of the year, except for the normal outages that I mentioned for the kiln replacement and maintenance outage at Wickliffe as well. So, yes, I think the pain that we took in Q2 sets us up for the back half, where we should get back to our normal margins. And we think the demand and production will continue to increase as they continue to fill inventories on dealer lots.

Unidentified Analyst

Analyst

Okay, thanks. That's helpful. And just one quick follow-up. I see on Performance Materials side that price was a positive contributor to segment EBITDA. And I know, in past downturns, you guys have been pretty successful in pushing through prices. Is that kind of what's happening right now? Or is there something else going on with that number?

Ed Woodcock

Analyst

No, it's still the case. We annually look at our product pricing and we try to capture the value that it creates. We put a significant amount of price in non-China in this quarter. We did add a price increase in China. So, that was showing up some for the quarter. But again, I think it's just the cumulative year-over-year price increases that you're seeing additive for the quarter.

Unidentified Analyst

Analyst

Okay, thank you. I really appreciate it.

Operator

Operator

Thank you. Our next question today is coming from Jon Tanwanteng from CJS Securities. Your line is now live.

Peter Lucas

Analyst

Yes, hi, good morning. It's Peter Lucas for Jon. You guys have covered most everything. I guess, just one general question for me in terms of your outlook. How does that change if a second U.S. stimulus bill is or isn't passed?

John Fortson

Analyst

Well, obviously, a stimulus bill, to the extent it helps consumer sentiment, particularly on the auto side, would just give us more confidence to be probably more towards the higher end of the guidance that we've given. But right now, we sort of stand behind. We think, auto sales are in that 75% to 85% range by the end of the year. It's just a question of how quickly they get there and does it stay sustained.

Peter Lucas

Analyst

Perfect. And as I said, the other questions were answered. So, thank you.

Operator

Operator

Thank you. Our next question today is coming from Paretosh Misra from Berenberg. Your line is now live.

Paretosh Misra

Analyst

Thank you. Good morning. So, in Performance Materials in China, as we go into Q3, there's really no incremental adoption there, right, due to China 6. In other words, China was essentially at 100% for the entire Q2.

Ed Woodcock

Analyst

Yes, Paretosh, this is Ed. That's correct.

Paretosh Misra

Analyst

Got it. And then, quickly on the engineered -- in engineered polymers, have you fully absorbed that accounting benefit that you've talked about before, that $7 million benefit, I guess? Or is that yet to be reflected in numbers?

Michael Smith

Analyst

I think that's primarily all been accounted for, yes.

Paretosh Misra

Analyst

Got it. And lastly, just going through your industrial specialty business, how likely you think that it bottomed in second quarter? Given that some of the substitute prices have improved and you realized them or see them, I guess, with a bit of a lag, and just the general improvement in industrial activity in Q3 versus Q2, so which should be good for your volumes. And any comments on that would be great.

Michael Smith

Analyst

Yes, I'd certainly like to believe the second quarter is around the bottom. That said, as we sit here early in the third quarter, I wouldn't be able to say that we're seeing a real uptick compared to where we were in the second quarter. It feels like we're kind of bumping around -- bumping along a pretty low level in the industrial specialty market. And we will just need more broader industrial demand to pick up in order to get that turnaround.

Paretosh Misra

Analyst

Understood, that's fair. Thanks, guys. That's all I had.

Michael Smith

Analyst

Thank you, Paretosh.

Operator

Operator

[Operator Instructions] Our next question today is coming from Daniel Rizzo from Jefferies. Your line is now live.

Daniel Rizzo

Analyst

Thanks for taking my questions. Just a couple. You mentioned that at this point, oil services is only about 8% of total sales. Is that a business that you could or would consider just exiting or just completely de-emphasizing, given how small it's now and the outlook for oil domestically? I mean, I know you had some wins in the Middle East Coast when you withdrew [ph] process is there.

Michael Smith

Analyst

I think that you have to think about the sort of contribution that our oilfield business makes to the overall refinery balance. The oil business is based on TOFA or TOFA derivatives. And so, having an important outlet like the oilfield market and to be able to make specialty derivatives for the oilfield market I think is one that really sort of meshes well with our sort of refinery system in general. So, at this point, I wouldn't see that we would be exiting the oilfield business in that regard.

Daniel Rizzo

Analyst

Okay. And then just my second question, you mentioned some maintenance outages in China, in Kentucky and then a kiln replacement. I was wondering if that was just like a pull-forward where that was expected for next year and you just did it early and that now you're good for five years. Or just -- did you just do some turnaround faster or quicker than were expected? Or was this -- I just wanted to know just some color around the thought process there.

Michael Smith

Analyst

Yes, Dan. We did -- when we were taking downtime, we took care of a number of maintenance outages issues. The kiln placement in Covington is a long shutdown for us. We couldn't pull that forward just because of the magnitude of contractors and what has to happen to pull out a kiln and replace it with a new one. So that's -- excuse me?

Daniel Rizzo

Analyst

How long does a kiln last and must be replaced?

Michael Smith

Analyst

Yes, these are 20-year assets. And so, if you think back to the mid-90s, when we put ORVR in place, all those kilns were added. So they, basically we've gone through over the last five years, working through replacing those kilns, and this will be the last one for us. Outage timing is about 30 days.

Daniel Rizzo

Analyst

Okay. And the cost?

Michael Smith

Analyst

$2 million to $3 million [ph].

Daniel Rizzo

Analyst

Thank you very much.

Operator

Operator

Thank you. Our next question today is coming from Chris Kapsch from Loop Capital Markets. Your line is now live.

Chris Kapsch

Analyst

Yes, good morning. Just a question on the Performance Chemicals segment. The EBITDA margin 23.6% was, although down, pretty reasonable, considering the magnitude of the sales decline and considering that you probably had some adverse mix, at least from maybe the oilfield business being down. So, I'm just curious if you -- some of the story there is you're getting benefit from lower CTO costs. Or the other thing that might have dragged, I guess, late in the quarter was the under-absorption, having shut down the Crossett facility for maybe a couple of weeks in the quarter. So, I'm just wondering what's buttressing the EBITDA margins and how does that play out sort of going into the third quarter, especially with Crossett having been shut for, it looks like, most of July.

Michael Smith

Analyst

Yes. Thank you, Chris. And we're pleased that even under a challenging conditions that EBITDA margins in Chemicals are holding up pretty well. To answer your first point, CTO did not have any impact on those margins. They've been reasonably steady versus last year. The benefits that we were having was our continued focus strategically on really pushing the higher-derivatized, higher-value products. So, if you think about, in the second quarter, as we would expect that continue to happen in the third quarter, we've got strong pavement technology business. And that business is holding up well, and that is a very high margin business and one that the team is continually working on increasing its innovation and trying to do whatever we can, especially pushing Evotherm or any new products that we have that come in at higher margin. And the other part is the Capa business. The margin in the Capa business is certainly higher than the average for Performance Chemicals. And Chris, relatively speaking, that's also holding up pretty well. So, I think that kind of puts us in a pretty sustainable position as we head into the third quarter.

Chris Kapsch

Analyst

Okay. And then, does the -- will the -- the shut down, I guess, of Crossett for most of July, will that have an adverse impact on margins on a sequential basis? And I assume, since the seasonality of the pave -- there is seasonality with the pavement business. And then, the -- there's outsize benefit presumably in the second and third quarter. Is that the right way to think about that? Thank you.

Michael Smith

Analyst

Yes, Chris. So, in terms of the Crossett furlough, it will -- certainly, from that plan site, the lower absorption has a negative impact. But the fact that we took the cost reduction activity by furloughing the employees there for six weeks helped offset that negative absorption. And then, what we also do is make sure that we're really optimizing our three-plant network. So, to the effect that we are bringing the Crossett down, we can move sales of other products to support other customers to either the Charleston and DeRidder facility in a way that optimizes the business and allowed us the opportunity to remove cost through the six-week furlough at Crossett. And in terms of the other point, yes, I think that as you mentioned, as you recognized, the second and third quarters are the strong quarters for the pavement business, and third quarter for pavement is off to a good start. And so, we feel that that should continue pretty well.

Chris Kapsch

Analyst

Thank you.

Operator

Operator

Thank you. We have reached end of our question-and-answer session. I'd like to turn the floor back over to Jack for any further or closing comments.

Jack Maurer

Analyst

Thank you, Kevin. So, thank you everyone for your time and interest this morning. We remain very positive about our long-term business outlook. And look forward to talking with you again next quarter. Thank you.

Operator

Operator

Thank you. This does concludes today's teleconference. You may disconnect your line at this time and have a wonderful day. We thank you for your participation today.