Good morning or good afternoon, all. And welcome to the Ingevity Second Quarter 2023 Earnings Call and Webcast. My name is Adam, and I will be your operator for today. [Operator Instructions] I will now hand the floor over to John Nypaver to begin. So, John, please go ahead when you are ready

Thank you, Adam. Good morning. And welcome to Ingevity’s second quarter 2023 earnings call. Earlier this morning, we posted a presentation on our Investor site that you can use to follow today’s discussion. It can be found on ir.Ingevity.com under Events and Presentations. Also 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 measures are included in our earnings release and are also in our Form 10-K. We may also make forward-looking statements regarding future events and future financial performance of the company during this call and we caution you that these statements are just projections and actual results or events may differ materially from those projections as further described in our earnings release. Our agenda is on slide three. Our speakers today are John Fortson, our President and CEO; and Mary Hall, our CFO. Our business leads Ed Woodcock, President of Performance Materials; and Rich White, President of Performance Chemicals are available for questions and comments. Steve Hulme, President of Advanced Polymer Technologies is away on business travel. So John will field any APT questions. John will start us off with some highlights for the quarter. Mary will follow with a review of our consolidated financial performance and the business segment results for the second quarter. John will then provide an update on guidance, followed by closing comments. With that, over to you, John.

Thanks, John, and hello, everyone. On slide four you can see our highlights for Q2. The team delivered double-digit revenue growth, while maintaining mid-20s EBITDA margins, a great outcome in this environment. Three of our four business lines performed well. Performance Materials had double-digit growth from last year and we saw sequential growth as well. We were excited to see Nexeon, the company in which we invested $60 million last year, has announced an agreement to supply silicon anode material to Panasonic, one of the world’s leading battery companies. Additionally, overnight Nexeon issued another press release announcing their intention to build a manufacturing plant in Korea, as well as a supply agreement with OCI. Nexeon’s silicon-based anode solution can increase the energy density of lithium-ion cells by up to 50%, increasing vehicle range and reducing charging time. This agreement validates the promise of Nexeon’s technology and its progress and development. We are continuing our joint development work with Nexeon to include our activated carbon in their solution. This is a great step forward in our multi-pronged approach to finding alternative uses for our carbon. The Advanced Polymer Technologies team continues to manage that business efficiently and effectively, increasing margins into the 20s even with sluggish economies in Europe and China, APT’s two largest markets. While volumes were down in lower-margin areas like footwear, we saw volume growth in the strategic areas we identified at our Investor Day, bioplastics and automotive applications such as paint protective films, increasing recognition for the sustainable nature of our technology is supporting growth in bioplastics. Just recently we added to our growing list of biodegradable certifications when our Capa Thermoplastic products were awarded the TUV Austria SOIL Certification for providing biodegradable solutions for agricultural and horticultural applications. Results in the Performance Chemicals segment reflect two…

Thanks, John and good morning all. Please turn to slide five. Sales were up almost 15% as a result of stronger pricing across all segments and higher volumes in the Performance Materials segment and Pavement Technologies business line and the addition of Ozark, which we acquired in Q4 of last year. If Ozark were excluded, sales were still up versus prior year. These positives more than offset the impact of volume declines in the Industrial Specialties business line and the APC segment. Gross profit was up slightly year-over-year, but adjusted gross margin was down about 440 basis points due primarily to higher input costs, particularly CTO and the impact on plant throughput of lower volumes, particularly in Industrial Specialties. SG&A excluding depreciation and amortization, improved to 9.5% of sales compared with 11.2% in the prior year. Adjusted EBITDA for the quarter was $120.7 million, flat to last year, with an adjusted EBITDA margin of 25.1%, a very solid result given the challenges we faced in the quarter. Diluted adjusted EPS of $1.41 is lower than prior year, due primarily to higher interest expense and D&A associated with the Ozark acquisition and a higher effective income tax rate driven primarily by higher U.K. earnings and this year’s increase in U.K. corporate tax rates from 19% to 25%. Turning to slide six. You will see that our free cash flow of $27 million for the quarter was a bit lower than usual for Q2, reflecting significant working capital increases in the quarter, particularly for inventory of rosin-based products and CTO as demand for rosin-based products continued to be weak in the quarter, and in response, we dialed back processing of CTO. During the quarter, we repurchased about $59 million of shares, bringing our year-to-date total to about $92 million, and while we…

Thanks, Mary. As you saw in our release, we are reducing our guidance for the remainder of the year. When we provided our original full year guidance, we knew that elevated CTO prices would negatively impact the business. But we expected a more robust recovery in China and a stabilizing Europe that would allow growth in our Pavement Technology business, Performance Materials and APT to more than offset the shortfall. When we reported our Q1 results in May, it was clear the recovery in China was not going as planned and Europe was facing an industrial slowdown. We were one of the first companies to say this. And remember, China, along with the rest of Asia and Europe represented roughly half of PM sales and nearly three-quarters of APT sales. Therefore, when we didn’t see the boost from those regions, we realized we would not be able to offset higher CTO prices and we reduced our guidance, which brings us to where we are now. We still have not seen significant improvement in China or Europe. General market weakness continues to suppress volumes in our Industrial Specialties business and the historically high CTO prices we are expected to moderate have remained elevated. We don’t expect to see relief from these prices until 2024, which is why we are reducing guidance for the remainder of the year. We are taking actions to mitigate, our CTO exposure longer term, consistent with the strategy that we laid out for you at our Investor Day. There are four variables we managed in the Performance Chemicals segment, two of which are in our direct control. Our industrial end markets will improve as the economy improves. CTO costs should come down as the biofuels market matures and rationalizes. Our AFA strategy will reduce our risk exposure.…

[Operator Instructions] Our first question today comes from Vincent Anderson from Stifel. Vincent, your line is open. Please go ahead.

Yeah. Thanks and good morning. So let’s just kind of start with CTO and here’s what I think I know about CTO markets right now. So spot as best we can tell is down. There is no biofuel capacity that emerged out of the blue. U.S. exports year-to-date through May are down 10% generally falling for the last two years, export prices there seem to have also peaked in March. So we don’t have a lot to go off of. But the only place that we are seeing prices stay elevated are the prices you pay and export prices to Sweden and Finland, which is a little different given Kraton has assets there. So I know your contracts are confidential, but is there anything you can unpack for us as to why we have this apparent disconnect and what gives you confidence that this won’t be a persistent risk?

Yeah. So I will kick it off and if you want to add anything, Rich, please do. But listen, we have tried to ring-fence for you, Vincent, the impacts, right? So we have given you a number that hopefully will help navigate the market or let everyone understand exactly what the issue is for us, right, with extreme transparency. The problem that you are running into is, this is not an efficient market. So the data that you see whether it’s Argus or elsewhere does not necessarily reflect exactly what’s going on, because as you have identified, they sometimes includes certain exports, don’t include other exports. They sometimes include the biofuels market, sometimes don’t include the biofuels market. They do -- and just to be candid we didn’t even contribute our data to Argus until recently, right? So that is not unfortunately an efficient or effective way to look at it. Now I will tell you that our pricing will tend to lag probably what you seeing by anywhere from three months to six months, right? But that works kind of against us when prices are coming down and works for us when prices are coming up, right? But even that you have to be careful with, right? So we are aware of this problem from the market, because I know everyone wants to be able to sort of forward predictors. So we are trying to give you the scope of the issue for this year, right? I mean it’s a $200 million hole, for lack of a better term that we were able to claw back or recover about $100 million so far. We are going to do the best we can to continue those efforts, but that’s what we are up against. Longer term I do think CTO prices will come down. I think that the market got ahead of itself on speculation for European biofuel inputs, the European biofuel market has not materialized at the rate that people were anticipating and we went into a period of economic weakness. So you will see some CTO relief. But I cannot tell you exactly what that level will come to. We have an idea of where it should land, but again this is not a totally efficient market. But I hope that gives you some more color, Vincent.

Yeah. No. That’s helpful and very fair points. Turning over to the demand side, on the margin side of the equation, could you give us a rough order of magnitude around what your mix impact looks like when you lose a rosin ester sale into something like an adhesive and have to instead drum that product and send it to the export spot market instead?

Well, our merchant rosin sale -- this is Rich, Vince. Our merchant rosin sales had for the most part abated, which is why we are building so much rosin inventory at the moment, but on order of magnitude our rosin sales into the merchant market are significantly on the order of 50% less than what we are doing in the derivatives market today, the merchant rosin…

Okay…

…again in that matter [ph].

And if I could add, compared to the alternatives, whether it’s hydrocarbons or gum rosin, our merchant rosin pricing to-date has been about 15% higher than merchant rosin, I mean, gum rosin area and about 30% higher than the hydrocarbon market to-date.

Okay. So we are kind of past the negative mix impact of losing your higher value derivatives or into really more just absolute volume demand when we think about…

I think and the way we…

…and in the back half of the year? Yeah.

That’s correct.

I think that’s fair.

Yeah.

Okay. And then just a really quick one and I will turn it over. But do you have to requalify any of your pavement products based on feedstock change like moving from TOFA to AFA?

Yeah. Primarily for North America, not so much externally, not outside of the U.S., but yes.

Okay. And did I understand correctly in your prepared remarks that you have already begun that process in some respect?

We have. Yes. We have. It just takes time.

Okay. Yeah. No. Of course. All right. Thank you. That’s helpful. I will hop back in the queue.

The next question is from John McNulty from BMO Capital Markets. John, your line is open. Please go ahead.

Yeah. Good morning. Thanks for taking my questions. So the magnitude of the cut for the full year is admittedly pretty chunky, but it looks like there’s a lot to kind of unpack here. So I guess can you kind of bucket it out for us, how much is tied to the incremental costs around the WestRock transition, if you will, how much is tied to actual CTO cost and then how much of it’s tied to just running at lower operating rates and kind of having absorbed that fixed cost absorption? I guess can you help us maybe bucket these kind of bigger categories?

So I will start. The WestRock impact that I mentioned in my remarks, it really goes to cash costs and expenses. We will be kind of I think of it as carving those out from the GAAP results. So going forward and that impact would be excluded in our adjusted numbers, but it’s still cash. So if you note in the release or in the deck that we provided, we also did reduce our guidance with respect to free cash flow coming down and a lot of that, particularly, the second half of the year is related to the cash costs associated with the WestRock transition. With respect to the EBITDA decline, that’s more, again, CTO related and the inability -- both the inability to push enough price to recover those costs, because their end markets are soft, but also the general economic slowdown, which is not permitting a robust recovery in PM or APT to offset or mitigate the costs in fact.

Right. I mean, John, it’s difficult to separate CTO versus the end markets, right? I mean, you have seen us go through cycles before, where we have built rosin, but the last one, really kind of occurred in 2018, right? The reason we are in this situation with the orders of magnitude is this large hit to CTO, right, which is why we are trying to quantify for you the numbers so you can understand what the ramifications is, right? I mean, when you look at the Performance Chemicals segment with large, you can do the math on the margins of the Pavement Tech piece of that and come to an annual number, because it’s really spread out mostly over Q2 and Q3 as you know and then you can kind of impute what the ramifications are for Industrial Specialties. It’s a large number. I mean they are absorbing $200 million of incremental cost, of which we have been able to claw across the company, about $100 back. So would a better economic environment have helped that? Sure. Had we stayed -- I mean, it’s interesting, because we have done a lot of internal analysis, had the market environment stayed as it was last year, we would have been able to bear the CTO inflation. And I say that kind of across all of our businesses, right, not just Inspec, but we would have been able to absorb it. It’s just the economic environment is weakened to the point where this is the put and take of those two, right?

Okay. Okay. No. That’s helpful. And I guess when you think about the reduction in the guide, because, look, CTO was high before and it seems like from a contractual side you probably had a rough idea how those costs we are going to play out this year. So is it…

Sure.

… at least when you gave kind of the prior guide. So, I guess, how should we think about the incremental thing that changed that’s causing you to pull down the guidance? Is it just that China is that much weaker and…

The markets are weaker, John. I mean I don’t -- I want to be very clear, because I want everybody to understand.

Okay.

I mean the CTO, it is true and I think sometimes people have missed that. The cost of our CTO has been gradually escalating over the course of the year, right? We talked about this at Investor Day, but I don’t know, Q2 was more expensive than Q1, Q3 is going to be more expensive than Q2, Q4 is going to be more expensive than Q3, it will level out going into 2004, okay? So -- and at that point we will be more, what I would call, at-market, meaning that, we will -- to the extent we get some relief and CTO, we are going to really feel it, right? It will help us quite dramatically next year. But what’s causing the issue in the back part of the year is that the markets that we sell into have really, really weekend with the exception of Pavement Technologies in oil field. In particularly the rosin markets, it’s very reminiscent to me where we were back in 2018, where we are having to basically slow down rates, because we cannot move the rosin. Rosin is not selling. That’s what’s happening. We raised the prices…

Okay. And then maybe I can just follow…

John, before -- we raised prices last year in the Industrial Specialty businesses, almost a quarter of a billion dollars, actually over a quarter of a billion dollars, right? So we were in position to absorb this, right? The challenge is, is that people are not buying, right? So hopefully that’s helpful.

Yeah. No. I think it is. But just to understand -- just to make sure I have got this right, is the weakness in the rosin market, because the actual end customer, end product demand is soft or is it just look, they can’t handle the price and so they are just giving up on it…

They are not buying.

… and going to something else just so?

They are not buying, John. I mean, obviously, price moves up and down, and we will adjust price and we can adjust price, and we obviously, have a higher cost structure, but ultimately, they are not buying and they have the ability to substitute into lower cost alternatives

And I did mention, we estimate approximately 20% of our customers have shifted to lower cost alternatives. But maybe, Rich…

If you want to add to that.

… you could add to that.

I could, John, when we look at the overall demand in Industrial Specialties, particularly on the rosin products and you are talking about adhesives, rubber, paper sizing, we know many mills are shutting down and in printing inks. But when we look at the demand that we have seen this year, Mary is correct, 20% is related to reformulation to hydrocarbons or some other type of gum rosin, but 80%, 40% was related to destocking and another 40% was related to demand destruction and that’s pretty much what we have seen across the entirety of our rosin offering.

Got it. It’s -- that’s helpful. Thanks, everyone.

Okay. Thanks for calling.

The next question comes from Jon Tanwanteng from CJS Securities. Jon, your line is open. Please go ahead.

Hi. Good morning. Thanks for taking my questions. Mary, just to jump on the back of one of the prior questions. You guys have explained that the CTO and rosin hits pretty well. What is the reduction in the guidance in the PM and the APT businesses. What -- how much less is that expected to contribute this year compared to what you had thought maybe three months ago?

Yeah. I think, versus our last call, probably not too much change, but I think certainly, when we set the initial guidance, we expected a more robust recovery in China, and again, that the solid underlying economic trends that we had seen heading into the year would continue. While we are seeing, while we did see volume increases in PM, or certainly, not seeing the robust recovery in China that we had expected and it really is a tale of North America holding up and looking pretty good. But Asia sluggish and Europe frankly struggling. And on the APT front, again, remember the 75% of their products are sold into Asia and into Europe. So the lack of a rebound in China and Europe showing essentially no pickup at all have reduced our expectations for that business as well. Not -- certainly not to the extent of Industrial Specialties but versus what we had expected.

But that having been said, I mean, the growth rates for those businesses when you look at them on an annualized basis are still pretty robust and healthy compared to other segments or other businesses, right, that we are looking at. I mean, when you look at PM or you look at APT or you look at Pavement, they are all growing pretty healthily in this environment, right? Not so much -- PM not so much on the revenue side, but certainly on the profitability side, APT has really done a great job of moving their margins up, again, not so much on the revenue, but more on the profit side from where they were last year, some pavements have been a great year. So to Mary’s point, it’s certainly down from where we were last -- at the start of the year, our expectations, but from our last guide, I wouldn’t say, they have moved a whole lot, maybe a little bit, but not a lot.

Understood. Thank you. And then you started the call off with a really nice bright point, which is the Nexeon agreement to Panasonic and in Korea. Can you help us understand kind of the quantity of commercial sales that Nexeon is expecting to be doing, kind of when you expect to be in the supply chain supplying that material and if that’s any change from your prior expectations?

So, look, we are very encouraged. We are big fans of Nexeon, right? We are really excited by their success and it’s validating a lot of the work that we did as we analyzed and assessed our opportunities in that market. The reality is one plant, in our view in Korea is just the start, right? I mean this will involve thousands and thousands of tons of product as they ramp this up and move beyond just this initial contract that they started with Panasonic. What they have done is, what a lot of startup companies do, they have got good contracts, they are going to build in the region, they are tying to a strategic partner, they are doing all the right things to get in position to be successful and then grow this business, and we anticipate being a part of that. I don’t want to, as we talked about in Investor Day, nothing has changed. We don’t want to get ahead of ourselves, because we want -- we are going to be a part of that, but our view is that it’s really something that we will play a bigger role in the middle of the decade and beyond, right? And that’s really what we want. We have lots of great opportunity in our core businesses and we think that our position and our opportunity where we are focused, as they generate next-generation or as they develop next-generation technologies and I don’t know if you want to expand on that.

Yeah. Jon, I would say that, Nexeon put a press release out in the last 24 hours and that should be able to answer a fair amount of your questions on their pathway.

Particularly in the near-term.

Yeah.

Right.

Okay. Great. Thank you. And then just last quick one from me, how is the AFA transition progressing from a demand perspective, are you still in the capacity to bring online kind of where you expect to be by the end of the year there, especially…

Yeah. Look, nothing has changed, but…

…I think the segment. Yeah.

But, Jon, I think, it’s an important point, right, because while we have got these three businesses are doing well, we have got one business that has some secular or structural changes to it. And AFA is a critical part of our strategy to go forward. CTO prices, the economy will improve, we talked about that. We have those four variables. CTO prices will abate. They will come down. But over the long-haul the right answer is to offer our customers fatty acids that solve for their technology needs, right? And the advantage of AFA is that it is an alternate more reasonably sourced raw materials and it does not produce rosin, right? So we are very focused on it. It remains on track. We mentioned in our prepared comments that the volumes we anticipate producing it across next year will equal the CTO volumes that we have traditionally run through that plant. We continue to work and our customers are being receptive to the reformulations necessary. As I mentioned earlier, it just takes time. We cannot -- there are processes and testing, et cetera, that we have to go through. But ironically, high CTO prices help make that sale to the customer, because they need an alternate, right? And so we remain on track and very focused on this.

Okay. Great. Thanks, guys.

Next question is from Ian Zaffino from Oppenheimer. Ian, your line is open. Please go ahead.

Hi. Great. Thank you very much. Again on this AFA, I guess, the CTO prices continuing how they are, how much of your production do you think you will actually shift to AFA versus CTO and how long would that actually take? Thanks.

Well, again, so if you kind of think backwards -- back of the envelope, we have got a three plant network, right? One of those plants is going to move to solely or it has moved to running solely AFA and we have said that next year will be producing volumes equivalent to what we have traditionally run. So that gives you a sense of the volumes that we are talking about. Over the long-haul, as we mentioned at Investor Day, we have the action -- we have the ability to actually double volumes in the segment, if in fact, we are able to produce all of our CTO and all of our AFA. I don’t know how that will play out, but our goal is to effect the transition and offer substitute so that our customers can go, depending on the cost position of CTO, can move between those products and then also to expand into new markets down the road, right? But right now our focus clearly is on substitution and -- while we ramp up new markets

Okay. And then as far as the questions about or the comments about being able to transition or toggle back and forth between different AFA, CTO, how quickly are you actually able to do that and how flexible this will be versus say CTO prices come back down, et cetera?

Yes. We have committed to roughly $70 million of revenue this year coming from AFAs, that’s on track. We have not laid out yet what our expectations are for next year, you can make some assumptions based on the volume comments that we made earlier, right? But it is our intention over the next 24 months to have that plant fully moving on AFA offering alternatives

Okay. Thank you very much.

The next question is from Daniel Rizzo from Jefferies. Daniel, your line is open. Please go ahead.

Good morning. Thanks for taking my question. Just a follow-up on AFA, is there anything in the production process or is there an input that could cause the price of proofing AFA prices to kind of spike similar to I mean different product was something similar to what we saw with CTO and with rosin and things like that?

Well, to answer your question, look, this is the reason why we want to use multiple feedstock, right? Because of the biofuel market and it’s not only affecting CTO, it’s affecting a lot of the oleo chems, right, particularly those that are non-food-based, right, or those that don’t go into the food chain, right? And they -- people who follow those commodities who may be on the call know that they kind of ran up in 2021, 2022 and then ran down. They are typically more cyclical, because they are tied to a much broader sort of macroeconomic factors. All of these are being disrupted to some point to some extent by the biofuel market. The biofuel market gets regulated as the -- because the European regulators really look at how much biofuel they put in and out of their mix based on the price that the end consumers in Europe might pay, right? So those are going to -- that’s going to move around too. It will eventually, we think over the next two years or so stabilize out as that market matures and all the feedstocks sort of come into play. That’s one of the reasons we think CTO will come down from a pricing perspective, right? If you look at it, if they are out ahead of that market. It will come down. But we want -- what we like about multiple feedstocks is we can move between these as they -- you see different spikes in different chemicals. Soy is a great example. Soy ran up, now it’s ran down, so it’s very attractive right now. Canola ran up, ran down, it’s very attractive. So we want that flexibility in our feedstocks.

And let me tag on to that. So, soy, canola, for example, Dan, much, much bigger more liquid markets than CTO. And unlike CTO, remember CTO only made by paper mills. So their sales of CTO are episodic if you will. They are putting chunks into the market. So we are purchasing when they have product available et cetera, very different dynamic than a soy, canola type of market, again, because of the size of liquidity of the market. So our ability to control the timing of our purchases and perhaps hedge our purchases, because again there are cost curves, they are well established, the size of the market, et cetera, puts that purchasing dynamic in a very different framework than what we now have with CTO.

That’s helpful. That’s very helpful. Thank you. And then, is there anyway, I mean, are you thinking about, as you look at cutting costs, are you looking at anyway to, I don’t know, optimize your footprint, reduce the plant or put the plant near the...

Let me put it this way, Dan. All options are on the table, right?

Okay.

As you know, there’s lots of different levers that can be played when you are optimizing a footprint, but all options are on the table.

Okay. All right. Thank you.

[Operator Instructions] The next question comes from Mike Sison from Wells Fargo. Mike, your line is open. Please go ahead.

Hey. Good morning. So the $100 million gap that you have this year from CTO, how do you get that back next year? Is it just simply -- you are going to get more pricing I assume this year that flows into next year or do you need demand to sort of come back and then you get the pricing through?

I think of the four levers, Mike, that we talked about, right? Our intention is to try and get it back through continued growth in our other businesses and through continued escalation of C -- of AFA sales and through reduced cost structure, right? Certainly, improvement in market conditions or reduced CTO pricing would help us in that, right? So we have to look at all of those influences or market factors to try and manage this. We control two of them, right? So we will do what we can to control, but obviously to the extent, the market does improve or CTO pricing improves, that’s going to make our jobs easier.

And certainly, as China again, John’s comment about industrial recovery. Certainly China will pick up at some point, certainly I believe the economy will begin to pick up better than it has today. So again, even rosin, rosin markets have shown a history of taking a deep, digging a deep hole and then coming back quickly when they do turn. What John has discussed though is, we are not waiting for all those things to happen, we believe they will, but we don’t control the timing of those market dynamics. So the actions that we are taking are to better position us so that in those products and feedstocks where we have, we are more at, where we are at the mercy of…

The markets.

… the markets or certain very tightly controlled feedstocks that we are taking actions to put ourselves in a better position long-term.

No. I understood. And then, if you think about the price that these products are at now, if you do raise the price further, is that problem relative to maybe an oleo based product that you are kind of sort of tapped out and your ability to raise the price or is it…

No. I mean…

… if demand comes back, you can get the price? Yeah. Okay. And then some…

Well…

… of the Performance Materials...

Yeah. If demand comes back, Mike, we would expect to be able to at least hold prices. Now with demand where it is, even with some pricing concessions, certain customers are able to find lower cost alternatives.

Well, and we believe that as we make this move, we will be able to offer lower priced alternatives.

Yeah.

… while maintaining/improving our profitability, because some of these other raw materials are not nearly as expensive on a relative basis to crude tall oil today.

Got it. Got it. Okay. So, if I kept Performance Materials sort of my outlook similar to last quarter and I think a lot of companies have so it felt pretty good about the auto outlook for the second half of the year? And then it sounds like ATT will maybe, maybe slightly lower. It kind of implies Performance Chemicals takes a pretty big dip third quarter, fourth quarter…

Yeah. If you think about the margin…

… margins are going to be in line.

…it’s mostly in fourth quarter…

Is that the right way to think about it? Okay. Fourth quarter.

Yeah. If you think about it, it’s mostly fourth quarter, right? I mean when you think about Performance Chemicals, you have got this high profit high performing business that’s really generating in Q2, Q3 and those businesses really abate in Q1 and Q4, right? So when you -- we don’t provide quarterly guidance, but when your calendarising it, you need to understand that Q3, we will continue to benefit from asphalt and pavement sales, but in Q4 those sales don’t exist. So Q4 Performance Chemicals is going to take a hit, be challenged.

Okay. And then when we think -- last question, when you think about 2024 for Performance Chemicals, we should get a portion of that $100 million back based on what you are doing on, the things within your control and if CTO comes down, you could actually get the other remaining to be a plus $100 million next year?

It’s possible. I mean, it just depends on, I mean, my own view, Mike, because I don’t believe the CTO -- I don’t believe we are going to get all $200 million of that CTO back. I just want to be completely clear to everyone.

Yeah.

Right. I mean, but if the gap is $100 million, right, what do we do? Well, we have got those four things that work. How much cost can we take out, right? How much AFA can we sell, right? What kind of market improvement do we get, right? So, I mean, we actually feel like 2024, while in fact it’s going to be challenged, we have got levers to, but it’s a little early for me to gauge where the market in the CTO is at. What we are working on are the other two, because those we control.

Got it. Okay. Great. Thank you.

We have a follow-up from Vincent Anderson from Stifel. Vincent, please go ahead, your line is open.

Yeah. Thanks. So, John, I just -- I wanted to go back and clarify some of the AFA comments. Is your target volume for next year across it basically equivalent to the full Phase 1 that you outlined or are you implying more like two-thirds of that when you draw that CTO comparison?

Well, I -- so the way I would think about it, Vincent, is, we should be by this time next year, so the middle of the year running at full run rates, which would be about 125,000 tons give or take, right? So when you weigh that over the course of the year, it won’t be the full 125,000, right, because we will be ramping up in the first half of the year, right? We may do better than that, but that’s where we are sitting here right now, right?

Okay. And then as much as you are willing to comment, would that alone be enough to cover fixed costs at the plant and maybe even potentially contribute positive standalone margins?

Well, the goal as you know, Vincent, the more we run it, the more we cover our fixed costs, right, which is why we want that thing running as quickly as possible at those run rates, right? I just think realistically when you think about product certifications and all the complexities we talked about, it just takes time, right? To the extent we are able to find a new market customer that doesn’t need those certifications, we can accelerate that and we have hired a person to help us do that, right? To the extent we can continue to accelerate customer certifications that -- we can accelerate that. So but that’s our planning today.

Okay. And then just last one, promise. There’s still a lot of actually dislocation even within the vegetable oil and animal fat feedstock markets right now, because a lot of this new biodiesel capacity isn’t really set up to take crude grade products. What is your ability to accept lower grade products, whether it’s based crude, specialty oils or even some of the dirtier stuff that you don’t even really get pricing on?

Yeah. We have -- this is Rich. Yes. We have the ability to take some of the lower grade stuff in our processes in that and also are already sourcing some of that lower grade material today in our process that we are using at the Crossett facility right now.

Excellent. All right. Thank you. That’s all from me.

We have no further questions.

Yeah.

I would like to turn now to John [ph].

Yeah. Before you go, John, I have just been reflecting a little bit, Mike, on your thinking through the quarters and how the rest of the year will unfold. Because like I say, we don’t guide on quarters, but I do think it’s important to understand the timing and the sequence. When you think about our new guide, right, this revised guidance, you think about our earnings power that’s coming out of it, I mean, Q3 we talked about right, we have got all those businesses firing right PT, PM, APT, right? And in the fourth quarter, you got three of the four, basically, you got two of the four, right, basically you have got PM and APT. So our guide really is all about PM, APT and Pavement continuing the trajectory that they are on, but we are derisking from a guidance perspective, what’s happened with Inspec, right? So when you think about this. I mean you are correct. Inspec in Q3, and particularly, in Q4 when you will see it, the Performance Chemicals segment is going to underperform. But we are trying to derisk that from guidance, right? So going forward upside and the sort of downside, but we think hopefully more upside is really tied to those three core businesses, right? That’s it. Thank you, John Nypaver.

All right. well, thanks, everyone. That concludes our call and appreciate your interest in Ingevity and we will talk with you again next quarter.

This concludes today’s call. Thank you very much for attendance. You may now disconnect your lines.