Good morning all and thank you all for attending the Ingevity Second Quarter 2024 Earnings Call and Webcast. My name is Brika, and I will be your moderator today. [Operator Instructions]. I would now like to pass the conference over to your host, John Nypaver from Ingevity to begin. So you may proceed, John.

Thank you, Brika. Good morning and welcome to Ingevity's second-quarter 2024 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 most recent 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 3. Our speakers today are John Fortson, our President and CEO; and Mary Dean Hall, our CFO. Our business leads Ed Woodcock, President of Performance Materials; Rich White, President of Performance Chemicals; and Steve Hume, President of Advanced Polymer Technologies are available for questions and comments. John will start us off with some highlights for the quarter and an update on our repositioning efforts and Performance Chemicals. Mary will follow with a review of our consolidated financial performance and the business segment results for the second quarter. John will then provide closing comments and discuss 2024 guidance. With that, over to you, John.

Thanks, John, and hello, everyone. There's lots to talk about in this call. As you have no doubt seen, we announced further repositioning of our Performance Chemicals segment, a process that started last fall with the closure of our DeRidder, Louisiana facility. Mary and I will speak in detail about what we have done, why and where we are going. These recent actions, the termination of the CTO supply contract, goodwill impairment and the relocation of our oil refining to Charleston are important milestones to move the PC segments forward and get these issues behind us to create a stronger, more stable PC segment for 2025 and beyond. First, though, let us address the quarter. Turning to slide 4. Overall, it was a mixed quarter. I'll start with highlighting Performance Materials, who for the first time ever delivered a fourth straight quarter of 50%-plus EBITDA margins. Most simply the value we get in the market for our products, lower production cost and increased hybrid adoption are more than offsetting both soft auto production and full BEV vehicle market penetration. Macro trends continue to benefit the segment as hybrids and ICE vehicles are making up a larger mix of autos being produced. And while the cost of energy improved versus last year, what is helping this segment maintain these margins is our plants are using less energy due to operational efficiencies the team has implemented. Both the commercial team and the operations team are ensuring this segment continues to fire on all cylinders. Advanced Polymer Technologies saw a third straight quarter of volume growth and year-over-year volumes were up as well. We see encouraging signs in end markets such as electronics and auto, which is driving higher demand for Capa encodings and high-performing adhesives. Year volumes have begun to bounce back.…

Thanks, John, and good morning, all. Please turn to slide 8. Second quarter sales of $390.6 million were down 19% due primarily to our repositioning actions in Performance Chemicals, which included reducing our exposure to certain low margin, end markets in the Industrial Specialties product line and continued weakness in industrial demand, which impacted both Industrial Specialties and APT. In addition, we saw lower sales in road technologies in the quarter due to adverse weather conditions in North America. EBITDA margins improved 80 basis points to 26% as a strong quarter from Performance Materials more than offset lower margins in Performance Chemicals. During the quarter, we had $13 million of restructuring charges and $24 million of CTO resale losses related to the Performance Chemicals repositioning. We also booked a noncash goodwill impairment charge of $349 million for the Performance Chemicals segment, which was triggered when we received new information from our long-term supplier regarding CTO. pricing for the second half of 2024, which was much higher than expected. When performing the goodwill impairment testing, we updated the growth assumptions for all product lines in Performance Chemicals as required. The combination of current depressed financial performance and the continued weakness in industrial demand with limited indications of near term recovery caused us to revise our growth expectations for Industrial Specialties end markets, including oleo markets and road markings, which is being negatively impacted by fierce competition in the paint space, which represents approximately half of our road markings product sales. Our analysis indicated that the book value of the segment significantly exceeded fair value, resulting in a total impairment of performance chemicals recorded goodwill. The goodwill charge of $349 million, the CTL losses of $24 million and the restructuring charges of $13 million are combined total of $386 million of non…

Thanks, Mary. Please turn to slide 13. This has been a busy quarter at Ingevity. We discussed additional steps taken in our repositioning efforts. We discussed terminating our CTO contracts. We discussed this lower sale of our oleo-based and inspect products in a weaker industrial market and weather delays impacting Road tech. Based on what we see at this point, industrial markets remain soft going into the second half of the year. More bad weather impacted road construction in July. Therefore, we are revising our full year sales guidance to be between $1.4 billion and $1.5 billion and adjusted EBITDA guidance to be between $350 and $360 million. This reflects the uncertainty we have as to whether road crews have the time to make up the lost sales due to adverse weather, higher CTO costs and inventory affecting Performance Chemicals bottom line and a lack of an industrial recovery that could affect both APT and our oil based products in the Industrial Specialties line. We can't control the weather, but we can control how we reposition our Performance Chemicals segment to deliver sustained profitability. We remain confident that Ingevity will emerge from 2024 stronger and better. There are nearly $200 million of outflows on that free cash flow table that won't be there next year. We are working to deliver mid to high 20% margins on a consolidated basis and generate over $150 million a year in free cash flow, which we will use to delever the balance sheet and then return cash to shareholders. With that, I'll turn it over to questions.

[Operator Instructions]. We have the first question from John McNulty with BMO Capital Markets.

Yes. Thanks for taking my question. Obviously a lot going on and a lot to unpack. So I guess the first thing I wanted to understand better is you're going to continue to have kind of the CTO high cost pressures through the first quarter and then they should drop off to kind of more market level. If today's market was kind of what you see, whatever, say, Q2 of next year, how much of a quarterly benefit would that be on the market pricing versus the stuff that you're working through in your inventory right now, how should we think about that?

Yes. So John, probably the simplest way to think about that is, I think we expect that the price that we're paying for CTO in a given quarter is probably going to fall by half. It's going to be half, roughly. I mean, it's obviously the market will do what the market will do and we're talking about nine months away, eight months away. But our expectation based on what we're seeing today and where the market is, is that starting in Q2 of 2025, first off, we're not buying anymore off market CTO now, right? So the cash drain piece is nipped, right or cauterized. So while we, but we will be running, as we alluded to, this higher inventory CTO through our plants and therefore through our P&L, right? But by second quarter of next year, we will be running a lower-cost CTO that we will be procuring in the open market and that cost should be about half of what we're paying today. Assuming today's levels. Yes, I mean, it may be better or candidly, but I don't, I think half is probably the right way to think about it, right?

Okay. Got it. That's helpful. And then on the paving business, so it sounds like you lost I don't know, somewhere in the neighborhood of $15 to $25 million or so on wet weather or so and it sounds like that's going to also impact you in 3Q. So whatever, let's call it $40-plus million of revenue that may be getting pushed out. I guess if that can't be made up this year, should we assume that gets additive to next year or is it with municipalities, it's kind of a look, you use your budget this year, you don't, it's not like you get to push into the following year. I guess, how should we be thinking about that? Because it does seem like a lot of high value, high-value product for you that at least temporarily has been kind of sidelined.

Well, so, I mean a couple of things in that question, right? And Rich is here. So you can chime in, Rich. But the weather, there's no doubt we're having sort of a weird weather year, right? So the paving season got off, and this has happened to us in the past, right? The paving season got off to a slow start, then it kind of fired back up, then we sort of had some weather in Texas in July, which has made July a little soft, and we'll see what August, September holds. There is, as I alluded to in my comments, I mean, the pavers are incentivized to go as long as they can, right? And so to the extent the weather pattern shifts and we're able to pave later into the season, we may have a stronger than normal sort of first couple of months of Q4, and we've seen that happen before, right? So, but it's too early to call, and we are sort of having a strange weather year. So we're taking a prudent approach. With regards to rollovers to next year, it has been our experience that funding is put in and pavers will roll back to the next year, meaning that they have a a plan, they allocate money to it, they get it done, they don't get it done, it will bode well for next year because it will get pushed. But we also have to take that year on year, right? Because we have to see what the environment is. Directionally paving interest in paving and efforts to continue to pay and spend on infrastructure remain strong. But that does, that that would be the normal pattern for us.

Got it. Okay. And if I could sneak in maybe one last one. The $30 to $35 million that you expect to save from the Crossett rationalization, I guess, should we be thinking about that even coming through evenly? Is it back-end loaded for 2025? I guess how should we be thinking about that?

It's pretty even in the sense that the plant will cease operations here very shortly, right? So the full, by the end of the year the full benefits will be rolling through in 2025. Just to sort of build on the comments that were prepared, John, you can look at those numbers and obviously, deduce that the fixed costs of trying to run that site because it is a refinery. So it needs high utilization to make it operate, right? And we are just basically taking an operating philosophy now that we're going to build it as we go, right? So we were hopeful and I think in a stronger industrial environment thought that the utilization could pick up in that site quickly enough that we wouldn't need to take these actions. But what we're, we were confronted with a choice of not knowing and having some uncertainty is to what the next couple of years impact would be from an earnings perspective versus using an existing refinery, it's a secondary refinery that we have in Charleston that for very modest amount, we're going to build it as we grow, right? So as I alluded to in my comments, with very modest investment, we can kind of get 50% of the output across it and we'll just make those capacity expansions as needed. But we're not abandoning or changing the overall AFA approach.

Got it. Okay. Thanks very much. All makes sense. Appreciate it.

We now have Daniel Rizzo with Jefferies.

Good morning, and thank you for taking my call. Once you do the changes and move to North Charleston, what will be your capacity utilization for refining at that site?

Well, we don't really always discuss those, but obviously it's going to improve, right? Because we're moving utilization from Crossett to Charleston, but we have plenty of room to expand capacity both on the CTO and non CTO and oleo-based refining, right? So we feel comfortable that we can expand and produce going forward there. And as I kind of alluded to, we can build as we grow back by making relatively modest changes to how we do things to expand that utilization, right? I mean, we will invest in Charleston as needed, but we can do it in a more capital-efficient manner versus the current footprint that we're sitting here today, right? And I think it's important, as you've said, everyone on this call understands, I mean, we've gone from what was a three plant network down to a one plant network. And so the throughput and absorption you're going to get on a consolidated basis by doing that, it's pretty significant. But that has to be done when you look at the changes in the cost structure that's happening in that business, right? And so that's the math and that's the work that we've been doing over the course, well, it really started in November of last year, right?

No I mean, would you, when you say just you can expand as needed, would that be just simple, like, de-bottlenecking? Or is it less than that. I mean, is it just, I mean, obviously, there's --

I mean, it's de-bottlenecking, It's piping. These are relatively modest things that, frankly, plants are always doing. But because this is a, it's a very large site, one that we've operated for a long period of time, there's, we have a pretty robust and pretty clear, this is what we spent the last six, nine months doing sort of trying to lay out what this would look like.

Okay. And then finally, I think you mentioned that lower energy was a tailwind. I think you said in Performance Materials, I was wondering what percentage of COGS energy is. Is it significant?

It's very significant. I mean beyond the raw material costs of basically sawdust and phosphoric acid. It is a big burn or natural gas, right? And it's a big explanation of what's been transpiring in that margin.

Thank you very much.

Your next question comes from Jonathan Tanwanteng with CJS Securities.

Hi, good morning. Thank you for the questions. Wanted to focus on the outperformance in the materials business, which has really been fantastic. I heard the commentary on the margins, which is great, but I was wondering if you could speak to the revenue run rate and if that is sustainable going forward? Do you think hybrid and ICE cars continue to, I guess, sustain that kind of revenue run rate? Or is there, is it more of a resumption of other, I guess, challenges as EV and other things pick up in the second half and through the near future?

No, and Ed is sitting next to me, so he can chime in as appropriate. I think we feel pretty good that the revenue environment that we're operating in today is going to be around for a while, right? And we feel good, as Mary alluded to in her prepared comments, certainly about the remainder of 2024. But I think we feel good in a more extended period. And I would refer you back to the prepared comments because what's really going on here, John, and it's, I know there's lots of puts and takes with auto production and then you know what is a hybrid versus what is an all-electric, but simply put, what's really happening here is the value that business is getting towards products, right, coupled with the cost savings that team has put in and as we alluded to, I mean, a number of these are structural, right? We are using less energy. This is a, these are basically large kilns right? So they're burning a lot of natural gas, right? Those two things are more than offsetting effectively softness of auto production. And that's kind of bouncing around depending on what region you're in or what have you and the adoption of all-electric vehicles, because, remember, we are on hybrid, right? And I think our strategy will be to continue to pull the levers that we have to deal with the puts and takes of the auto industry. And we do feel very good, though, certainly about the remainder of this year and in the next couple of years.

Got it. Thank you. And then just within the guidance, are you expecting any sequential improvements in payment, number one? And number two, are you including any restructuring savings in this year? I know you said next year, but seeing as this plan closing in 20, in August, are you realizing something, Q3 and Q4?

Yes. So I mean, it is August, right? Also, I'll take the last part first. By the time, these closures occur over the next couple of months, the ability to really significantly impact 2024 is fairly modest, right? But there will be some, but pretty modest, right? Because you're talking about something really starting to see it sometime in Q4, right, by the time you sort of get all this done, right? With regards to paving, you know us well enough, Jon. We tell it as we see it right? And we tried to be as transparent as we can. We had a weak start to the year. We had a weak first month, good two months, right? Now, we've had kind of a weak July. We are going out and talking about that because it's true and people saw the storms, right? We'll see what August and September hold and then we'll see what happens in October, November, right? Because this has happened to us in the past. It's not a normal year, but if the weather holds, the pavers will go into the fourth quarter as long as they can to make up for this lost business, right? But if the weather doesn't hold the they can't. And then those projects will get pushed into next year. So that's an assumption we can't make, right? So we are taking a conservative position based on what we know, and we'll see how the year pans out.

Understood. Thank you.

[Operator Instructions]. And we now have Mike Sison with Wells Fargo.

Hey, good morning. What's the run rate sales for Performance Chemicals as we head into 2025? Is it a $600 million business, $500 million business. Just trying to figure out kind of how that sort of shakes out with the restructuring?

Well, we're not, Mike, we're not, it's the 1 of August, right? So we're not really talking about, and I understand that people want to look beyond us. And so what we're saying is, is that as we've sort of been clear all year, this is the year we're going to fix this business so that we can emerge stronger in 2025. What I would tell you is that the sales impact of shutting Crossett is going to be relatively diminimus, right? Because we're transferring all that to Charleston, right? So I would encourage you to look at thinking about the quarters of this year and making some annualization because really what we've done, we don't have DeRidder this year. We have been operating with Charleston and Crossett and Crossett was not a revenue generator per se. So you can, and those revenues will transfer, right? We're not losing. So I would encourage you to think about what the annualization looks like for '24, right? This is the baseline for what '25 would be.

Got it. And then, I mean, I get it, I mean, it's probably a tough question, but what gives you confidence that as we head into second quarter '25, that when you need CTO supply, that prices will be better than what they are now? I know it's a tough question, sorry.

There is really two things right, that I would point you to. You could argue a third, but one is we know with great clarity and I recognize we don't disclose this to the broader market, but we know with tremendous clarity how far off the prices we've been paying our suppliers were with what was available in the market, meaning what we were buying or could have bought from other parties, what we believe our competitors were buying it at, what transactions we're seeing in that market, right? We know some of that because we were selling, CTOs, right? So we know, right? Now we alluded to this earlier. And as I said, that benefit should be half is probably a good place to start, right? Now you said yourself and I understand this okay, well, the market is the market. What makes you feel confident the market will stay. It may move around, but we've got a lot of play room from where we were, right? What I would also say is we're in a weaker economic environment, right? So demand is not as robust as it can be. The biofuels industry is not consuming as much yet as what could arise at some point. So their demand for this product is relatively muted, right? And over the last however many months, by terminating these contracts and by closing, first by moving Crossett to a AFA based plant and then shutting DeRidder, we've eliminated 200-plus thousand tons of demand for this stuff it used to be in the marketplace, right? So supply demand economics would tell you that the price for CTO should remain relatively muted. Now there is a new source of demand with the biofuel stuff, but that demand it seems pretty known, right? And is relatively muted. So I think we can state with some comfort, although nothing is certain, but you know, we're going to benefit next year from two things. One is we're going to have a reduced cost structure, which we've pointed to today. First was what we did in DeRidder in November. Now is what we have announced today and that has some real value. And you can look at the math of what we disclosed. And then we told you that our CTO cost should come down a lot. So this is all a part of getting this business back to profitability and positive cash generation. But that footprint at -- an annual set of assets are gone. I mean, we're down to one side, right? So those things are happening, that's happened.

Right. And then, so I guess final question, just if I think about industrial specialties as it is going forward, what do you need to see in terms of profitability returns? It's a fairly small business now relative to the portfolio. And I guess is there a hurdle rate where you need to get to where and if you don't, is it potential that you have to either divested or move on from the business? Or is there at least a fundamental reason you think that this will be a good business longer-term?

Well, listen, we always reserve the right, as we've said, to assess the portfolio and make adjustments to optimize Ingevity right? I mean, we've got a business that even with all this noise has EBITDA margins of like 26%, right? So we want to get this cash position to me, that's been a problem, right? I mean, we're not, we're relatively highly levered in today's market, and we, our cash generation has been impacted by this. So we have cauterized that and can move forward starting to generate cash and get that debt back down, right? So the, what I would tell you is that we're focused on getting this business back to what we would call a acceptable level of profitability and have laid out for you all the structural things that will happen with reduced footprint costs and with CTO savings, and then we'll make, we need then factor in the market itself, right? So is this a 2022 market? It is not, right? This is not a post-COVID balanced market. But the, and the industrial markets, at least this year have remained relatively benign and we're not talking '25, we'll have to see, right? I mean, I was reading yesterday, there's talk of rate cuts and other things. So we'll see where that goes. But our focus is let's get the cash generation, let's stop that bleeding and reverse it back to a more normalized footprint and then let's get this business back to acceptable levels of profitability.

Great. Thank you.

Thank you. I would like to hand it back to you, John Nypaver for some final remarks.

Thanks, Brika. Thanks, everyone, for joining us. That concludes our call and we'll speak with you again next quarter.

Thank you all for joining the Ingevity second-quarter 2024 earnings call and webcast. Please enjoy the rest of your day, and you may now disconnect.