Hello, and welcome to the Ingevity Fourth Quarter and Full Year 2023 Earnings Call. My name is Alex and I'll be coordinating the call today. [Operator Instructions] I hand over to your host, John Nypaver to begin. Please go ahead.

Thank you Alex. Good morning and welcome to Ingevity's fourth quarter and full year 2023 earnings call. Early this morning, we posted a presentation on our investor site that you can use to follow today's discussions. 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. 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 3. Our speakers today are John Fortson, our President and CEO; and Mary Hall, our CFO. Our business leads Ed Woodcock, President of Performance Materials; Rich White, President of Performance Chemicals; and Steve Hulme, President of Advanced Polymer Technologies are available for questions and comments. John will start us off with some highlights for the year. Mary will follow with a review of our consolidated financial performance and the business segment results for the fourth quarter and full year. John will then provide closing comments and our 2024 guidance. Our prepared comments will focus on full year results, but we are happy to take questions on the quarter during the Q&A portion of the call. With that over to you John.

Thanks, John, and hello, everyone. On slide 4, you can see what our highlights of Ingevity's 2023. In a challenging year, our most profitable businesses performed incredibly well. As you all know the broader industrial markets experienced a major downturn last year and we were not immune. We have also been grappling with unprecedented CTO raw inflation in our Performance Chemicals segment. Despite all that, we accomplished a lot last year. Performance Materials posted their highest sales and EBITDA ever. Global auto production is getting closer to pre-2020 levels with a good part of that growth a result of China and other Asian countries exporting more vehicles. Another growth driver is the increased production of hybrid automobiles and more fuel-efficient internal combustion engines. Consumers around the world are showing an increased preference for these options. Even though the engines in these vehicles are smaller than traditional ICE engines, we get similar value for our content and hybrids and more fuel-efficient ICE engines as we do in traditional ICE engines because of the value our technology brings to the evaporative emissions solution, advanced polymer technologies, which we reported as its own segment in 2023 was impacted by the industrial slowdown. Their traditional end markets, what we refer to as old economy when speaking about APT are industrial in nature and volume was down across the board, but since focus is on New Economy markets, which are end markets that present exciting growth opportunities where the sustainable nature of caprolactone technology has added value. This includes markets such as high-tech paint protective film on autos, where Capa provides durability and food packaging where Capa is used to improve flexibility and more importantly improve the biodegradability of the package in multiple environments. That biodegradable quality is also being recognized by more and more…

Thanks, John and good morning, all. Please turn to slide 5. As John mentioned in 2023, we accelerated the implementation of our strategy to diversify our performance chemical feedstocks and reposition the segment for profitable growth. These actions resulted in after-tax charges of $120 million in Q4 and $138 million for full year 2023. These charges drove a GAAP net loss for Q4 of $117 million and a full year net loss of $5 million. We'll discuss our results on a non-GAAP basis for the remainder of our presentation and prepared remarks. Please refer to our earnings release for reconciliations to these of these non-GAAP financial measures to their most comparable GAAP financial measures. Full year sales were up slightly as increased global automotive production and the addition of the road markings business drove growth in Performance Materials and road technologies, respectively. This was largely offset by sharp volume declines in APT and the Industrial Specialties business line due to the global industrial slowdown which continued throughout the year. Adjusted gross profit of approximately $560 million was lower by 12% primarily due to the higher CTO costs we discussed throughout the year. This combined with lower volumes and the negative impact on plant utilization rates resulted in a 500 basis points drop in adjusted gross margin to 33.1%. Adjusted SG&A improved by 14% due to the cost savings actions taken during the year and lower variable comp. These cost savings actions are expected to result in annual savings beginning in 2024 of $65 million to $75 million. Adjusted EBITDA for the year was down 12% to $396.8 million with an adjusted EBITDA margin of 23.5% down about 360 basis points from full year 2022 as the gross margin compression of 500 basis points was partially offset with the cost savings.…

Thanks, Mary. Our guidance for 2024 for sales of between $1.4 billion and $1.55 billion and adjusted EBITDA between $365 million and $390 million. The midpoint of $1.475 billion and $377 million for revenue and EBITDA, reflect a balanced approach to next year, Ingevity as a result of a lot of effort across the company is positioned for success. Both the Performance Materials segment and the Road Technologies business should continue to experience strong momentum and growth. The PM business is benefiting from both consumer preference for hybrids overall electric vehicles in the current market, and challenges to EV infrastructure both in terms of production, but also in recharging. As it maximizes the opportunity in its legacy markets, the segment continues to advance its carbon juice in both battery technology and other applications, as it manages the auto industry transition. Road Technologies continues to benefit from increased spending on roads in the US and around the world and is gaining share versus other more traditional technologies. The cost structure at APT has improved to a point, where they can maintain industry-leading margins. Despite weak volumes in the back half of 2023, we expect APT volumes to increase sequentially each quarter in 2024. This will be a transitional year for Industrial Specialties. While most of the charges associated with the closure of DeRidder are in restructuring charges, there remains $10 million to $15 million of online costs that we expect to incur in 2024 that are included in our guidance. In addition, we have made great progress in the conversion of our Crossett site to run non CTO oil-based raw materials but as we ramp up those efforts, which has included building out a commercial team and working with customers to test products, we expect to have $15 million to $25…

[Operator Instructions] Our first question for today comes from Vincent Anderson of Stifel. Your line is now open. Please go ahead.

Yes, thanks. Good morning, everyone and John, thanks for pointing out some of those discrete items on Industrial Specialties, but maybe just to go back to Crossett. You were planning I think to be call it breakeven by the middle of the year and then you also have some incremental ramp-up costs related to commercialization. Can you just maybe marry those two things, especially compared to what kind of drag it was on earnings in 2023?

We were trying to be very responsive to your flash note from last night Vincent. Our transition is well underway. We remain committed to this. Yes, it's a question of sort of optimization of the production footprint relative to how the demand ramps up, right? I mean the oleochemical markets large are suffering like the broader industrial market. So they are challenged as well. And while a number of those companies operate privately but we are in this industry and we can see the implications of that, but it will recover and we want to be there as it ramps back up, right. And I would also tell you that the certification process and the build-out of the commercial side just takes time. There are a number of regulatory hoops that we have to kind of jump through and you submit this stuff and you have to wait for the review. So – we’re pushing forward with all those things. We're really pleased, particularly with the substitution effects that we've been able to take and pavement our legacy sort of payment businesses. That team has done a terrific job finding ways to affect those substitutions and it will be a big part of that story as these approvals come through. To a lesser extent I also think the work that's going on in the oil our side of the business, our legacy oilfield products also have some opportunities. But I do think that in this current environment, we will struggle to meet our previously stated objective of profitability this year. It is possible but in this environment, I think it's going to be a challenge, which is why we tried to lay that out very discreetly in the -- in our prepared comments.

Okay. That's helpful. And maybe just staying on that -- that point. You made a pretty big hire, at least in the fatty acid world a pretty big hire with Rebecca Belmer, but that would seem to indicate that you're looking at those more consumer focused product groups maybe sooner than you were communicating. Is that a fair interpretation?

Yes. So, I mean look, our strategy really is not that different from what was laid out last year, right? So, we're really attacking on two fronts, right? One is substitution in our legacy markets, right? So, as the CTO has inflated and it is true that CTO costs are coming down, but by historical standards, they're going to be elevated, right? They're still going to remain very elevated. So, we need to be able to offer to our legacy customers, products that make sense and that are no competitive substitute. So what is sort of going to be the new pricing dynamic for our legacy crude tall oil products? So that -- that's one thrust. And there's a lot of work going on by our existing teams and trying to affect that. We made some hires including Rebecca and she's a great woman. She was actually here yesterday in the building, in this room, but as we did some meetings. But we also want to use our work in these new chemistries for us to enter new markets that are less cyclical, less industrial-oriented have better margin profiles. And that's really around personal care and food and nutrition, right? So, we've made hires. It's going to take a little while, as I said, for these things to sort of pay off if you will. But I mean in this environment, it's a little more challenging. We probably do have some opportunities operationally to take some costs and sort of lower our production overheads as we tried to manage through the year. But it doesn't change the overall story, right? So, this is the area where we're focused and we think that there's real opportunities for Ingevity.

All right. Great. And then I just have one quick one and then I'll turn it over. But if I remember correctly, didn't you have some equipment down in DeRidder that had been converted over to work with the capital Blackstone business, and if that's correct, what is the plan for that capacity?

Yes. So we're looking at it's still an instant, right? At some point, we're going to need to expand that polyol capacity, so whether we move this equipment or build it out in Asia or somewhere else in the US, these are all options that we're looking at. The good news is that the reactors there. And we're just trying to figure out where the right places and what that right situation. It's also possible that someone else might operate DeRidder, we could use it. I don't want to over-promise on that but we're looking at all the options.

Okay. All right. Thank you very much.

Thank you. Our next question comes from Jon Tanwanteng of CJS Securities. Your line is now open. Please go ahead.

Hi. Thanks for taking my question. The first one was, I was wondering what your underlying assumption is in 2024 in the guidance for the carbon business compared to auto sales or maybe PHEV or hybrid sales, and your assumptions for content per vehicle?

Hey, Jon. This is Ed. We think, obviously, there's some second-guessing going with the with the Biden administration on the adoption of battery electric vehicles. What we're seeing though is definitely consumer preference for hybrids versus battery electric vehicles in the US for every one BEV that is sold. There is 1.3 hybrids being sold, so preference there. And then, similarly in Europe, Europe for every one BEV that's been registered, there's 2.2 hybrids being registered. So, I think they're going to continue or the OEMs are going to continue to drive electric vehicles, but the consumers are shifting more towards hybrids and plug-in hybrids as a whole. And we do have relatively good content on those vehicles and we'll continue to be supplying carbon to that to those markets.

Yes, let me just Jon to add onto that to give you some granularity because I know what you're trying to do sort of build out your forecast, right? I think it's important to focus on the ratios that Ed just gave you right because there's no shortage of forecasts out there calling EV penetration and -- but you have to really dig in because different people categorize EVs different ways. There's partial hybrids, there's full hybrids, there's plug-in hybrids. So, you have to really look at all those different forecasts, take a view on what you think that looks like and then just sort of temper that with really the ratio that that Ed just said which is consumer preference. Our personal view is that the sale of hybrids and ICE engines is going to come in better than the broader forecast sit today. And I don't want to name names you can pick there's a lot of them out there from the banks to the research houses or what have you. The other thing you need to understand which we made reference to today is that the content we have on these hybrids and is now at or comparable to what we have with ICE. If you really want to be conservative I would pick sort of the midpoints of our content lower recognized and that will raise prices et cetera over time to manage some of that, right? So, that's probably the best way we can help you kind of navigate what we expect next year to have continued growth and momentum in that business. And it's really not only the production of automobiles continuing to recover globally, but it's this mix shift that Ed's referring to as consumer preference move towards hybrid.

Got it. That's helpful on. I was also wondering if you could talk provide a little more clarity on the AFA expectations, the alternative volume on feedstocks, are the costs are higher than you expected to ramp that business or beyond. Is the volume expectation lower just because of the macro or is it a combination of both that's causing you to go after?

The latter. The cost are actually in -- I mean is the cost equation so that's good. Tough to see in our financials because some of it is in restructuring from years past. And one of it was in the transition costs, of course, I mean the absolute cost position of the site et cetera has improved to the tune of close to 30% to 40%, right? It's just getting the takeoff because of the situation in the broader environment. It means that we're probably going to bear some of those for a little bit longer than we would like.

Got it. And then one final one for me. Just with regards to covenants, which quarter do you expect to be the tightest on under your current bank agreements as you look forward into Q1 because of seasonality? Or is there something else going on with your resells and any other--

Its Q2 Jon because it led EBITDA fourth quarter EBITDA flows.

Remember it's looking backwards, right? So, Q1 will be our sort of weakest quarter if you will because of the things we described. And that's not unusual. It's been that way for a long time here at this company. But that sort of measurement to Mary's point was back, right? So, it will show up in the Q2. But I also want to be very clear we feel like we have lots of headroom when we know we have lots of headroom in our bank covenants and the way that the ratios work in the actual bank deal. So, we do not consider ourselves to have any liquidity risks whatsoever.

Understood. Thank you. I'll jump back in queue.

Thank you. Our next question comes from Mike Sison of Wells Fargo. Your line is now open, please go ahead.

Hey guys. Good morning so for Performance Chemicals in 2024, if you exclude the $30 million to $80 million in cash losses that you noted what should the underlying business sort of look like in terms of either And EBITDA margin growth just if we can peel away the issues of CTO, how does that how does that -- how do the remaining businesses sort of performed this year?

So, again in the guidance if you take those midpoints just for example you get to that mid-20s EBITDA margin versus the 23.5 where we landed in 2023.

Just talking on consolidated run rate.

Right.

Right. So I mean look if you were to dissect or peel back the onion to kind of figure it out, right? The Performance Materials business is going to have margins side modalities do,…

… have extra hyper facilities IT and at least at mid-20s -- in a low-to-mid-20.

So you can kind of impute that the margin profile of the PC Business is going to remain depressed and probably not that different from where it was this year, right? Or but I also want to be clear, it's on a lower sales number, right, because we are not operating DeRidder, right? But I think as the year…

Right.

progresses, you're going to see that margin profile of that business improve partially for macro reasons, but also as a result of some of the restructuring that we've done and the impacts that that's going to have on the business, right.

Right. Okay. And then you sort of noted that that could be a slower ramp up in end-market market sales for the oleo based products. Is there upside to that meaning can you maybe walk us through what your teams are doing to maybe accelerate some of the some of some of the some of the some of the new specifications there and how you're going at trying to convert folks more into this product line versus the others?

We're being we're moving as I mentioned Mike, look, set aside the macro economic environment which is slowing demand. And it's just it's across all oleo chemistry. So it's not unique to what we're trying to offer, right? We are moving as fast as we can with these development processes, right? So we have sent multiple samples to all of our key customers. I was met with the EPA several weeks ago in person in DC. We are moving this process along as quickly as possible, but you don't just flip a switch particularly when you're talking about industrial customers that have never executed a transition like this, right? So these are not these are not products that have a long history of being made, right? So we're having to go in and do the reformulations and then get the approvals both from the customers and from a regulatory perspective. And that unfortunately just takes some time. To the extent we're able to accelerate those processes then we're going to benefit from that. To the extent the macro economy improves we're going to benefit from that.

And we put the commercial team in place the commercial team is now built out and in place and again driving that activity which will help accelerate our efforts once that underlying environment improves.

And they are there I would say Mike when we have hopefully demonstrated a history to everyone that we're not just going to sit back and wait on this to happen. To the extent there are not substantive changes or the environment erodes further, we will take changes operationally and continue to restructure accordingly to do what we have to do. We're not sitting here in February in a position to opine. No one has a crystal ball, but we're ready to execute on a lot of different options depending on how things play out.

Right. Great. And then just quick follow-up on advanced polymer technologies, volumes have been pretty weak for quite some time. When do you think you will see or could see an inflection point there? I know a lot of its destocking and some companies have said it's kind of decided for different end markets and stuff. So badly built ourselves for that is rising and the room was going to go…

Listen, in that business. It's a function of price volume, right?

Yeah.

It's a function of whether they can substitute primarily to sort of an alternate material right. And more volumes were hit pretty significantly in the last part of last year but we held prices right and ultimately we held those prices and we repositioned the cost structure of the business its EBITDA actually grew quite dramatically as a result of that and got back to the margin levels that we expect them to be at going forward. We're going to manage that business volume and price relationship to ensure that the margin profile stays in that zip code. Now it is you know, like a lot of our business is kind of lumpy on quarter. So you can't expect every quarter to it moves around. But the goal for the years to have margins comparable to what they had this year and we can drive volumes by reducing price, but we want to have that balance, right, to make sure that we maintain the margin profile. My personal view is, I think, volumes will pick up starting in Q2. When I look at the backlog, and the order book and conversations with our colleagues in Warrington, I think that starting in Q2, you're going to see it begin to kind of pick up. I do think that business has a seasonality to it which we've noticed over the last few years that is sometimes lost. And I think it's been amplified by sort of the broader economic environment and that people kind of and I hate to use this much abused word de-stock or take down inventory levels and the end of the year then they kind of wait a little while to see what the environment's going to be like and then they start buying again right? That's just the economic environment that we're in today.

And just add a comment to that too. I mean, Steve consensus very global, and as I mentioned in my comments on Asia in particular hit his business was quite hard hit by the weakness in Asia. And again, when that picks up we should see some recovery. We'll see recovery in his business.

Got it. Thank you.

Our next question comes from Daniel Rizzo of Jefferies. Your line is now open. Please go ahead.

Good morning, and thank you for taking my question in Performance Materials. I mean, given the strength of your margins. I was wondering, if they can still go a lot higher given what you're seeing in demand from hybrid or just mix or how we should think about it over the next three to five years if it's just going to be continuously kind of trending upwards or near peak?

Well, Dan, so it's a great business that is very well executed, right? I think we've demonstrated that we have a history of trying to maximize and drive profitability in that business, right? And we will continue to do so. And directionally, I think if you were to look back over the last seven or eight years its margins have actually improved not every year, but sort of it continues to kind of go up and to the right. And that's a function of the quality of this business, right? So we're always looking for ways to maximize the return on it. And we're I think we're managing it pretty well. It's listen we as you guys know there's lots of puts and takes, right? I mean, the OEMs are trying to juggle a lot on their plate right now right they're trying to manage this transition. So they've got these EVs and those have a whole new cost structure and supply chain or what have you, but they're still making money on their larger trucks and SUVs. And so there's just a lot of work in all this and we're working as hard as we can. And I think we've demonstrated through thick and thin good times and bad COVID, non-COVID that this is a high-quality business with regards to next year and the next few years, we think that this business is going to continue to do very well because it's being driven now by consumer preference. And we think hybrids offer a great intermediate step as a part of this transition. And we are direct beneficiaries from that.

So with the demand for hybrid is there a particular region where the consumer is into it more like I don't know North America or China where it's really driving growth and one where maybe it's lagging on a regional basis. I was just wondering what the geographic mix was?

To some extent Dan it's global, right. I mean I think it's really interesting. And again you have to kind of peel back the onion, and I don't like naming tons of names and getting way into this. But a lot there are a lot of companies that are viewed, as what I would call Tesla alternatives, which is Tesla's obviously an all electric vehicle that actually sell a lot of hybrids, right? And I would tell you that, when I looked at North America and China which are the two markets that we really, obviously, focus on because of their size hybrids are where people are going and you can see it again in the ratios that, I think -- I would just call your attention back to the ratios that Ed laid out. We almost put that in our prepared remarks, because it's pretty important when you think about what consumer demand. And look, again, we know there's an EV transition and this transition is underway and there's a lot going on, but there is a consumer buying pattern that plays a big role in this when it comes to absolute sales and what volumes produce.

Okay. Okay. Thank you very much.

Thank you. [Operator Instructions] Our next question comes from Jon Tanwanteng CJS Securities. Your line is now open. Please go ahead.

Welcome back, Jon.

Hi. Thanks, John. Just for my follow-up and then following on that hybrid comment, I mean, I think it's great that hybrids and ICE engines are seeing a little longer lifetime or older than I guess others had expected. But does that reduce the urgency or push out the expectations for your alternative carbon efforts and especially as it pertains to the next year under the battery adjustments there?

Liten, it's not going to change, John, our overall strategy, right? We intend to be a participant in the auto industry selling activated carbon, and we want to get ourselves to a point where we are to some extent agnostic as to consumer choice, right? Because we want to provide what our customers need and their needs are driven by what consumers do, right? So we have ample capacity and ample capability to service hybrid needs while concurrently work on our other initiatives predominantly or the one that has the most public focus right now is Nexion, but that's not the only one we're looking at, right? So we're looking at other things as well, but we are going to be a participant and help the auto OEMs affect this transition.

Got it. Thank you. And then could you just remind us what the competitive dynamics in APT are like in Asia? I just know there's a competitor there. It derives its product and kind of what happens when, you know, the macro improves.

Yeah. So there are four producers of caprolactones, two of whom, BASF and Dicell, predominantly sell captive. They do sell excess monomer into the marketplace, and then there's also a Chinese company called Jurin that sells into the marketplace as well, right? So on one level we actually like having a depth. One of caprolactones' historical problems with adoption has been the scarcity of its supply, right? So a lot of large chemical formulators have been skittish or somewhat apprehensive about formulating with caprolactones because there just wasn't a whole lot of it out there and frankly, there was one source that was sort of non-captive or being sold predominantly to third parties, and that was in Warrington, and we own it now, right? So we think this actually bodes well for the broader market because we think that people will uptake or be more prone, more likely to adapt to technology once they know there's a lot of it, right? Like ourselves, everyone who is selling in China and in Asia writ large is suffering from the broader economic environment over there, right? So it's not unique to us. We can see it in everybody else's numbers, too. We are optimistic that that economy will begin to improve and pick up, but we just got to be patient on that.

Understood. And then finally for me, I was wondering if you could break out how much revenue you expect to generate in Q1 and Q2 from the lines of business that were closed and kind of what the tail looks like as you sell off this inventory that we've been counting on?

Yeah, we don't... look, we don't really guide by quarter, right? But I think you can look at our numbers and directionally understand that Derrida was a couple hundred million dollar business, right? Approaching 300 in peak cycle and lower than that and softer periods, right? So that should give you some sense. It also did not have the seasonality because it was not selling to pavement, right? But it has been running at relatively reduced rates for the last year or two, the last year anyway. So just be cognizant of that as you think your way through it. Look, I want to be also clear because I'm a little -- we're talking a lot about Q1. We have factored that into our guidance for the year, right? So there's nothing here that is untoward or unanticipated. We just wanted to be very clear with everyone just like we've always been about as that the Industrial Specialties business in particular moves through this period. But there are some challenges in that business. It will get better particularly for PC as the payment season gets going. It's going to look a lot like what happened last year, and so that Q4 is going to be somewhat. I think Q1 will be a little bit better than Q4 but it's going to be a challenge for them. And then it should kind of get a little bit better. The other thing I would tell you that as we think about the year, we've made as I mentioned in my remarks some pretty conservative assumptions around the price of CTO. So the price of CTO really ran up on us and from a year-on-year perspective is going to look elevated this year, but it's going to come down, we expect over the course of the year particularly in the back half. So I think you've got to think your way through as you do the calendarization, all the puts and takes of that.

And John I'd like to add, maybe I missed the comment, but John Fortson did call out in the guidance discussion that with respect to the unwind of the commercial part of that operation in DeRidder and exiting certain product lines, we quantified that as roughly $10 million to $15 million of underlying costs and expect most of that in the first half of the year related to those selling of the inventory and exiting certain commercial contract, commercial agreements et cetera. So I think that might be the number you're looking for in your modeling.

Got it. And is that incremental to the cost you detailed last quarter?

No, that is – well, it's in our guidance.

Okay. Fair enough. Thanks guys. Appreciate it.

Thank you. At this time we currently have no further questions. So I'll hand back to John Nypaver for any further remarks.

Great. Thanks. That concludes our call today. Thank you for your interest in Ingevity and we'll talk to you again next quarter.

Thank you for joining today's call. You may now disconnect your lines.