Ingevity Corporation Common Stock

Greetings. Welcome to the third quarter 2020 earnings webcast and conference call. At this time, all participants are in a listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note this conference is being recorded. I will now turn the conference over to your host, Jack Maher. You may begin.

Thank you, Somali. Good morning, everyone. Welcome to Ingevity's third quarter 2020 earnings conference call. Earlier this morning, we posted a presentation onto the investors section of our website. If you haven't already done so, I would encourage you to download this file so you can follow along during the call. You can find it by visiting ir.ingevity.com under events and presentations. For participants who are logged into our webcast, Slide number two of that deck, you'll see our disclaimer that today's earnings call may contain forward-looking statements. Relevant factors that could cause actual results to differ materially from these forward-looking statements are contained in our earnings release and in our SEC filings, including our Form 10-K and our most recent Form 10-Q. Mangevity undertakes no obligation to publicly release any revision to the projections and forward-looking statements made during this call or to update them to reflect events or circumstances occurring after the date of this call. Throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute, for comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP financial measures are included in our earnings release and can be found on the investor relations section of our website. Our agenda is on slide three. With me today are John Fortson, President and CEO and interim CFO, Mike Smith, President of Performance Chemicals, Ed Woodcock, President of Performance Materials, and Bill Hamilton, Vice President of Financial Planning and Analysis and Treasury. First, John will comment on the highlights of the quarter and our impressive results despite the COVID weakened economy. Then, Mike and Ed will review the performance of our two segments. Bill will discuss our current financial status and our recent senior note offerings. And then John will comment on our revised guidance and provide an overview of what we're calling Ingevity 2.0, a strategic approach to growth under his leadership as CEO. With that, I'll turn the call over to our CEO, John Fortson.

Thanks, Jack. Good morning, everyone. Thank you for joining us this morning. We appreciate your continued interest in longevity. If you turn to slide four, you'll note some highlights for the quarter. Overall, this was a great quarter, particularly with compared to the challenges we faced in the second quarter. Revenues in the third quarter were $332 million, down only 8% when compared to the previous year's quarter, despite the economic impacts of COVID-19. The Japanese third quarter results were driven by strong rebounds in automotive sales and production worldwide versus a weak second quarter, along with continued strong paving activity in both North America and internationally. Cost reduction actions and strong execution also helped set several records in our performance. These positives were partially offset by a weakened economic environment due to COVID that particularly impacted our performance chemicals businesses. with the exception of pavement technologies, which held up fairly well in this environment. With respect to earnings, the tested EBITDA were $128 million, up almost 12% from the previous year's quarter. This was an all-time quarterly record. The cost reduction initiatives we put into place that resulted in a leaner cost structure and our ability to effectively execute helped partially offset the declines in volumes on a consolidated basis. Our adjusted EBITDA margin for the company was 38.5%, which was also an all-time quarterly record. For the fourth quarter, we also generated strong free cash flow of $73.5 million. I want to thank everyone on the Ingevity team for all their work over the last six months. We have navigated the ups and downs in both of our segments. The team in Williamsboro, Georgia, where we produce our honeycomb scrubbers, continues to set production records. Recently, Some of the leadership team and I visited our Derrida, Louisiana pine chemicals facility. They have not missed a beat, despite having to deal with two hurricanes and a tropical storm in an eight-week period. The plant continues to run, even as many of our employees were without power at their residences for several weeks. Our performance this quarter is a testament to their efforts across the company. If you turn to slide five, you'll see the third quarter results for performance chemicals. At this point, I'll turn the call over to Mike Smith.

Mike? Thanks John. As mentioned, our performance chemical segment, with the exception of our pavement technology business, was particularly impacted by a weakened economic environment due to COVID-19. Overall, segment sales in the third quarter were $188 million, down 18% versus the prior year period. Sales to pavement technology applications were slightly higher than the prior year and set a quarterly record. While pavement sales in North America were essentially flat, were up sharply, albeit from a smaller base. Projects planned by the majority of state departments of transportation in the U.S. continue to proceed as planned and are expected to progress on schedule for the remainder of the paving season. China's sales growth also benefited from low-temperature recycling technology we've been promoting there over the last two years, and growth in Europe was driven by our pavement preservation technology adoption and a number of countries. Sales for engineered polymer products were down due to reduced industrial demand globally. Footwear and medical device sales were also down, with sales to bioplastic customers continuing to show growth. Bioplastic growth was particularly strong in North America, as customers used Kappa-based thermoplastics in specialty paper coatings and utensils. We anticipate improved sales to footwear and medical device applications. When the impact of COVID-19 on retail sales and medical procedures abates, we continue to be successful in sales of our derivatized polyols and thermoplastics in this business. In fact, in the quarter, polyols and thermoplastics accounted for approximately 80% of engineer polymer derivatives. Margins continue to reign strong, and given our raw materials' petrochemical link to benzene, we are realizing some benefits due to lower input costs. Sales decreased industrial specialties across all end-use applications for products in this area. These include adhesive, printing inks, lubricants, rubber, and paper chemicals. In addition, we continue to experience price pressure for our tallow rosin products. That said, we are encouraged that the Chinese dome rosin export price has increased over 10% during the last month, a positive signal of improving supply-demand dynamics. Also, We are seeing positive potential in our agricultural chemicals business where our altostick and altosol technologies for sustainable agriculture applications are progressing and have advanced to field trials with a number of our major customers. Additionally, sales of oil field technology customers were cut sharply in line with reduced drilling in North America. Sales in oil production applications were down moderately. That said, we are continuing to see wins in China and the Middle East as we work to diversify the geography of this business. Performance chemicals segment EBITDA were $47 million, down 21% versus the prior year due to lower volumes. Reduced volumes and plant throughput were partially offset by price mix impact and lower SG&A costs. We continued to control costs and generated a good mix of higher profitability products which resulted in our adjusted EBITDA margins remaining solidly in the mid-20s. We currently have an extended outage at a Warrington, UK facility for a planned monomer production glassware replacement project and have an upcoming outage in Q4 at our North Charleston plant as opposed to this outage occurring in the third quarter of last year. With that, I'll turn the call over to Ed Woodcock to review the results for performance materials.

Thanks, Mike. As you can see on slide six, revenues for the segment were up 10%. Automakers, particularly in the US and Canada, rebounded sharply. As such, sales of our gasoline vapor emission control solutions have risen dramatically versus the second quarter. The industry continues to work to refill vehicle pipeline. In fact, US vehicle inventory has been at a nine-year low for each of the last five months. With relatively strong vehicle demand, OEMs are struggling to refill dealer lots, and we estimate that this will continue into Q4. In the third quarter, vehicle sales in the U.S. and Canada were down 8.7%, and North American production was basically flat prior year at plus 0.4%. The U.S. mix of light duty trucks and SUVs versus cars has been at a record high mix of 77% since April. This high truck SUV mix is favorable as these larger vehicles typically have multiple honeycombs on their canister systems. This contributed to strong demand for our honeycomb scrubbers used to meet U.S. and Canadian regulatory standards. The team at our Waynesboro, Georgia facility continued to work hard and in response they set a quarterly record for honeycomb production. Sales of performance materials products in China continued to show strong growth sequentially and versus prior. July and August vehicle sales and production continued the trend that began in April where both sales and production are at or above prior year levels. July's vehicle sales and production were up 13.8% and 18.3% respectively. August continued the year-over-year trend with sales and production also up 9.5% and 3.8% respectively. September data has yet to be posted. Lastly, the implementation of China's sixth standard has been completed. Segment EBITDA were $80 million. up 48% versus the prior year period. Segment EBITDA margin increased 1,430 basis points to 55.9%. We benefited from a strong improvement in volume and volumes that leveraged our low variable costs, favorable price mix and plant spending, and lower legal costs. All of our facilities are back to running at their normal rates, and we expect no furloughs for the remainder of the year. In October, we began a 35-day kiln replacement outage at our Covington, Virginia facility. This completes the last of four kiln replacements at that facility. At this point, I'll turn the call over to John.

Thanks, Ed. Many of you on the call have met or spoken with Bill Hamilton, our Vice President of FP&A and Treasury. Hopefully, you also saw that last week we priced a high-yield bond at 3.875% and also amended and extended our bank deal. Bill was the architect of both of those transactions, so I would like him to speak to our capital structure at the end of Q3 and also what it looks like now going forward. Bill? Thanks, John.

I'd now like to discuss our capital structure, which you will find on slide 7. Our borrowing rate at the end of the quarter for our revolver is $5. plus 150 basis points. And the borrowing rates of our term loans are LIBOR plus 100 and LIBOR plus 150 basis points. Up to term loan, 166 million has been hedged in euros to be fixed at 1.35%. The rate of the senior notes issued in January 2018 remains fixed at 4.5%. And the $80 million industrial revenue bond borrowing rate remains at 7.67%. Resultant weighted average interest rate was approximately 2.6%. Net debt as of September 30th was $1.032 billion. Our net debt ratio was 2.73 times, which is down from the second quarter when it was 2.96 times. Trade working capital for the quarter decreased slightly from the previous sequential quarter to $273 million. which is 23% of sales. With regards to our capital allocation, given recent events and the impacts of the coronavirus to our business, our priorities have shifted somewhat. We are focused on returning to our long-term target net leverage between 2.0 and 2.5 times. That said, if and when the market stabilizes, we will be opportunistic for share repurchases going forward. Before the full scope of the coronavirus impacts were known in the first quarter, we did repurchase shares, and we have 467.6 million remaining on our current share repurchase authorization. While we continue to examine M&A opportunities, we are weighing those in light of the above preferred uses of capital. Additional information will be available in our Form 10-Q, which we expect to file later today. Turning to Slide 8, I'd like to provide some information regarding our updated capital structure. Last week, on October 20th, we undertook a two-part transaction that included an eight-year, $550 million senior unsecured notes offering at 3.875% and an amendment and extension of our revolving credit facility. When evaluating our capital structure, which was heavily weighted towards secured debt 2022 to 2023 maturities, We took an opportunistic approach and waited until unsecured debt at a rate below 4% was available to us. The proceeds of the notes will be used to repay our inside term bond agreement due in 2022 and the remaining $170 million outstanding on our revolver. Additionally, we downsized our revolving credit facility from $750 million to $500 million and extended it by just over two years to October 2025. In aggregate, these moves extended our debt maturity schedule to 5.8 years, an extension of almost three years. While this transaction is slightly dilutive to earnings per share, it secures a low cost flexible capital structure for the next several years. Additionally, we have a call on our existing 2026 senior unsecured notes in February 2021. By calling a portion of these notes, We have narrowed our fiscal year 2020 guidance for sales from between $1.1 and $1.2 billion to between $1.15 and $1.2 billion and increased and narrowed our guidance for adjusted EBITDA from between $310 and $350 million

to between $355 and $365 million. This indicates we are above what we previously characterized as the high scenario of our guidance. Performance materials sales and margins will normalize in the fourth quarter. However, full-year even-time margins for the segment will accrete somewhat from last year. This will be offset by weakness in the performance chemical segment. We'll be controlling our capital expenditures. We still plan to spend about $85 million, almost all of that on maintenance. As such, we expect free cash flow for the year to be greater than or equal to $175 million. This exceeds the free cash flow of $161 million that we achieved in 2019. And we expect to end the year at a net debt to adjusted EBITDA ratio of less than or equal to 2.75 times, despite lower EBITDA for the year. We remain confident in our business to the end of the year. While we may see continued weakness on the revenue line, given the cost controls we've implemented and the favorable mix of sales across our segments, we expect our adjusted EBITDA and adjusted EBITDA margins to remain favorable. And while uncertainty remains regarding global economic strength, we believe in the strength of our strategy and our team's ability to execute on the opportunities. Turning to slide 10, I'd like to step away from the numbers for just a moment in order to provide some perspectives on our future and share our plans for Ingevity 2.0, which is how we are referring to a refined approach to our growth moving forward. In order to understand what we mean by Ingevity 2.0, I think it's important for us to first understand what we've accomplished in the past or under Ingevity 1.0. Since late 2015, we've focused on executing our spinoff from Westrock as a standalone public trading company in May of 2016. In our first five years, we needed to ensure that we executed on the opportunity provided by the significant step-up in automotive regulatory standards in both the U.S., Canada, and then in China. And we did. And the growth of our performance materials segment has been remarkable as a result. At the same time, on the chemical side, we've driven up margins for our performance chemicals business from 13% to 23%. We've made substantial progress in organizing around our sustainable roots as a company and are beginning to quantify the impacts of our products on the environment. We believe that in our first phase as an independent company, we've established ourselves as a leading specialty chemicals company with top quartile financial metrics. Moving on to Jevity 1.0, we are not revising our fundamental vision, mission, values, or strategy. That said, 2.0 represents a new way of approaching our vision and strategy. We expect to do this by leveraging our inherent strengths in building technology-based customer partnerships that deepen our relationships, create greater value, and drive increased growth and profitability for our customers, ourselves, and our stakeholders. We'll continue to focus on high-margin, derivative-sized products that provide outsized performance and value to our customers. Over our 100-year history as a business, we've developed a solid reputation for innovation. We have the opportunity to build on this to drive organic growth. And while we inherently know that we are a sustainable enterprise, we want to use sustainability as a competitive advantage. And lastly, there are a number of macro trends that we believe are in our favor going forward. So turning to slide 11, let's take a look at those trends. First, we believe that the global focus on sustainability and quantifying companies' total carbon footprints has only just begun. While we've inherently known that we are a sustainable company, we've not quantified or communicated that to the degree that we should to either our customers or shareholders. That will change. 77% of our products come from renewable resources. That is a staggering number for a chemical company. As our customers work to increase their carbon footprints, we have a unique, differentiated opportunity to work with them to solve their issues with our chemistry. Second, More and more governments, both within the U.S. and internationally, are looking to regulate around environmental health and safety issues, and we believe our products, in many instances, are uniquely suited to solve those issues. One example of these types of opportunities is in the area of biofuels. Our assets, our people, and our facilities are uniquely positioned to look at a variety of feedstocks that could be used in this market, as well as in other traditional chemical applications. and lastly, we're going to leverage the trends related to renewable gas and accelerate our work on absorbed natural gas or A&G technology to provide alternate sources of demand for our carbons outside of our traditional focus on internal combustion engines. With that, let's turn to slide 12 where I'd like to focus on the three areas we will strategically focus our growth moving forward.

By placing greater emphasis on sustainability, customer centricity and innovation,

We expect to grow our company's revenue and profitability. For those of you who have been following us over the last year, especially earlier this summer as part of our sustainability-focused investor webinar and the release of our latest sustainability report in August, you understand that sustainability isn't a new concept to Ingevity. We have a long history dating back to our predecessor companies of managing the business with environmental, social, and governance tenets in mind. And it's inherent just by the nature of the products we make. As I mentioned, 77% of Ingevity's revenue comes from sustainable products. But more importantly, sustainability is woven into the fabric of our culture and our mission to purify, protect, and enhance the world around us. And we intend to continue to further quantify our brand promise. The initial greenhouse gas impact studies we recently completed for our new char and evotherm products are only the beginnings. Our goal is to complete an initiative to quantifiably evaluate the societal benefit of our significant product lines by 2022. We intend to embark on an aggressive certification program whereby our products are recognized for their renewable nature by a variety of recognized third-party experts. We believe this will be of value to customers. We also intend to take the success we've had in performance materials around gasoline vapor emission controls and expand our regulatory advocacy to the benefit of other product platforms such as our paving applications. In terms of customer centricity, we expect to broaden and deepen our already strong customer relationships. When we work side by side with our customers on technologies that solve problems, we achieve a level of stickiness within our customers' formulations. And as the world emerges from 2020 and its challenges, we see this as an opportunity to expand the use of our engineered polymer products. We also have significant opportunities around the world, in addition to the use of caprolactones, but also for our oil field and pavement products, where we can expand. We are already investing in an SAP HANA upgrade to best-in-class technology that will enhance the efficiency of our interactions and transactions with our customers. Lastly, we will focus on innovation. We are looking across our businesses at innovation opportunities. As I said earlier, we're going to accelerate our efforts on AMGs. But in addition, we're going to focus on identifying applications beyond automotive that can benefit from our activated carbon's unique ability to capture and release vapor molecules. This is just one example of where we think opportunities exist across our portfolio. We are not constrained by our current or historical products or customers, but instead are looking at where technology, regulatory, and market changes are creating opportunities. From a capital allocation standpoint, our focus remains on growth. with more emphasis on extracting maximum value from our current assets. We intend to remain a high margin, high free cash flow generating company that will provide us the opportunity to both invest in our future but also return capital to shareholders if appropriate. Hopefully, this gives you better insight into what we mean when we say Ingevity 2.0 and where we intend to take this company in our next phase of growth. These continue to be unprecedented times from a business standpoint. that we are incredibly pleased with our performance this quarter and year today. More importantly, given our track record on guidance and meeting guidance, we remain optimistic and confident in our guidance for the full year. We also believe that we're well positioned for value creation in the long term. As a market-leading global specialty chemicals company, we continue to leverage our technical expertise to the benefit of customers. Combined with a strong balance sheet and experienced management team, We believe in the soundness of our strategy and our ability to execute on the many opportunities in front of us. In closing, I appreciate the work and efforts of our 1,850 employees worldwide. They are a distinct competitive advantage for us. We continue to believe very strongly in the long-term potential for our company. We hope you share our enthusiasm for longevity. At this point, operator, we'll open the call up to questions.

And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question is from Ian DeFino with Oppenheimer. Please proceed with your questions.

Thank you very much. Thanks for doing this call. Why don't you maybe focus on materials? And I guess you saw some really nice pricing there. You know, where was that pricing? Maybe what region you saw that in? Maybe what was the driver of that? And then I have a follow up.

Thanks. Good question. Thank you. Price was global, mostly focused with our larger markets of NAFTA in China.

Okay, and is that type of pricing, has that now reached kind of a baseline? Is there additional opportunity to continue to take place there? And then also, you know, if we were to look at the demand side of the equation, how much of the demand or the volumes was, let's just say, refilling the pipelines versus underlying demand?

I guess for your first question, we historically have been putting price into our products over many years, typically averaging anywhere from 2% to 5% on an annual basis. We feel we'll continue to move price each year and obviously try to capture price wherever we can around the globe. From a demand perspective, volume was increasing in China as they fully implemented China 6. So we saw good year-over-year demand in that region in addition to the strong growth of sales that are happening in that region. And then NAFTA as well, with the rebound from Q2, we saw good demand, solid demand for our products, and solid demand for the OEMs products, which cascades down to us as well.

Okay. Thank you very much. I appreciate the callers. Thanks.

And our next question is from John Tanuantang with CJS Securities. Please proceed with your question.

Yes, good morning. It's Pete Lucas for John. Just one on the pavement side. How dependent are you on federal stimulus shoring up state budgets in terms of your outlook for 2021 there?

Well, federal spending clearly is very important, and there has been a one-year continuation on that. And like a lot of areas of the federal government, there's certainly some uncertainty in terms of the priorities and execution as we get into next year. But we're very optimistic that with all of the focus on infrastructure projects that across the board of federal government that, you know, they're going to get behind further increasing infrastructure spending. And I think that, you know, in time that should be, you know, continue to be a favorable tailwind for our payment technology business.

And just one more from me. In terms of the outlook for oil field at this point, how that figures into your margin or earnings growth story over the next year or so?

Yeah, so, Pete, you know, at this point, you know, we are – Like most people, just looking at what the industry experts are indicating for future oil field pricing and level of drilling activity in this current weak demand market. We are not, at this point, projecting a significant turnaround in that until we start to see overall global demand pick up for the oil industry. It will come, but we're not calling the time of that yet.

Great. Very helpful. Thanks, and congrats again on a great quarter.

Thanks. Thanks.

Our next question is from Mike Zeason with Wells Fargo. Please proceed with your question.

Hi, this is Richard on for Mike. Hello, Richard. Hi. Yeah, so great performance on the margin side. Just wanting to give some color around performance materials and the 56% margin. How much was that related to the return of facilities back online versus cost cuts and then price and mix and how that plays into it?

Richard, as I talked during my script, there's a good mix of vehicles in North America right now that is driving additional honeycomb demand. And so we're also seeing good trucks, SUVs with multiple honeycombs helping to push that price mix for us. And then the other mix is again in China where they're implementing the China 6 standard and previously with the much smaller canister with lower content of regular carbon in those canisters shifting to a higher content, higher volume, and also shifting the pellets. So we had a good strong mix change there as well.

The thing, Richard, I think you should – sometimes I think investors don't fully appreciate is just the high fixed cost nature of this business, right? And when you compare sort of Q2 to Q3 – It's a great window into the nature of that, right? I mean, this is a business that while it was down for, depending on how you think about it, six to eight weeks of a global auto shutdown, kind of had 25% margins. Those are pretty good. But by the standards of that business, you can see how it took a hit. But the inverse is when you get a quarter like Q3 where everybody's going full gangbusters, and you don't really have any big shutdowns or any big outages in that quarter, you can see what the potential is, right? It's just the benefit of the high fixed cost nature.

And that's why we look at margins in this business on a year-to-year basis rather than on a quarterly basis. That's right.

And keep in mind in Q4 that we, you know, there will be some outage time in Q4 and, you know, all the doing in and out looks good, you know, we do expect it to somewhat normalize, but to have Segment margins accrete year over year in an environment where we were down for six or eight weeks globally is pretty remarkable.

Definitely. But I guess in terms of longer term, what would you say are normalized margins? Is any of that cost reduction coming back next year? I mean, 41% was the margin last year, but... We're not really giving 21 guidance yet, right?

But what we have said... Yes, we've got some sort of unusual shocks running through the system in 2020, so I don't want to necessarily compare 2021 to 2020 or what have you, but over the horizon, we expect our margins to continue to accrete. So we're not ready to talk about 2021, but if you look at us as when we started this journey in 2016, we've kind of shown a pretty consistent movement up and to the right, and we don't see that necessarily happening. Thanks Richard. Well,

Thank you for joining us. Anywhere near the drop-off in the second quarter as a lot of businesses did when COVID first got hit. And that said, we're optimistic. The recent orders as we exited September and got into October on Engineer Palmer's side are really trending positively in a good direction. So we look forward to that continuing. In industrial specialties, the COVID impact has been broad in a lot of areas. We have general industrial weaknesses. and then we have certain areas and I'll just, you know, bring up Inks as a specific example where the COVID impact on the retail market and malls being down and therefore companies not printing up circulars that use the types of things that we have has been extremely dramatic, you know, in the second and third quarter. So as that situation abates and people get out to a more normalized life, you know, that situation would be nearly as dramatic.

Great, thanks guys.

And our next question is from John McNulty with BMO Capital Markets. Please proceed with your question.

Yeah, thanks for taking my question. So you highlighted that the strong cash flows that you guys have really generated kind of does put you in a position to actually kind of refocus capital Maybe away from debt reduction into either M&A or buybacks again. I guess, can you speak to, if you have a preference at this point, I mean, obviously your stock's been under a lot of pressure, yet at the same time, there does seem to be a focus by the market on growth, and growth can come in organically as well as organically. So can you speak to kind of how you're thinking about that capital deployment? And also, can you give us a little bit of color as to what you see in terms of the M&A pipeline that you may have been developing?

Yeah, so, you know, John, I appreciate the question, right? I mean, look, it doesn't take a rocket science just to kind of sort out that we will probably be in our target two to two and a half times leverage ratios at some point early to mid next year, right? We're on that trajectory, right? I think we do view ourselves as a growth company, right? We are looking at growth opportunities. I would sort of suggest that in this environment, they're more internally organically focused than M&A. You can never stop looking at M&A, but I think in this environment, the challenge is trying to get a buyer and a seller to agree on a five-year forecast and then also figure out what multiple you're going to pay, right? I just think The types of typical sort of deal flow that you see is pretty hard right now, right? And most of the deals I think you're seeing being announced are stuff that's been in the works for a while, right? So I think, look, I kind of view our swapping out a little bit of money that might otherwise have gone for M&A being more plowed into our internal organic growth. We do obviously have the flexibility to buy back shares. We have demonstrated that we will buy shares. We have the authorization. It's always on the table when we kind of look at our cash generation versus other places to deploy it. But we've always said from the beginning that if we don't have a use for it, that we'll return that capital. So both things are being looked at pretty carefully.

Got it. Fair enough. And then I guess... You know, on one of the trends that you're looking for in terms of growth opportunities, one of the comments you put down was on the natural gas containment side. Is that tied into some of the, I believe you were running a couple pilot programs for fleets and that type of thing around using natural gas for vehicles. Is that kind of what you're getting at? And can you give us an update as to how some of those pilot programs are working and if we can see this actually start to really kind of ring the cash register as we look out over the next 12 months or so?

Yeah, John, this is Ed. You're correct. We do have a number of pilot programs underway, principally a number of them going on in Pennsylvania based on some credits, and AFIG credits are available for natural gas vehicle conversions. Those credits, I mean, those pilot programs are expanding, and I don't want to get ahead of the business itself, but we see good demand, good efficacy of the product as a whole. and we continue to look at that whole business as favorable for creating another business segment for us over the long run. In the short term, we still have investments to do and we're continuing to drive greater commercialization across the platform. Just a little early to kind of declare success on it, but we feel it's got to go a lot of great legs in front of us.

Got it. And if I can maybe ask one just last question. I In terms of some of the big focus from an ESG perspective, from the regulators, it does seem like things have kind of accelerated at a pretty quick clip over the last six to nine months and a lot of stimulus is tied to more green initiatives, things like that. I guess when you look at the opportunity for new gasoline vapor emission standards, do you have any greater confidence in terms of in terms of potential new standards coming in, whether it's in Europe or China, or is it too early to tell at this point? Can you speak to that for us?

Yeah, not a problem. We talked about this a little bit over our webinar over the summer. We do see regulatory changes impacting us over the next five to seven years. Obviously, Brazil's has already been promulgated, and they'll be moving forward with that starting around 2022, 2023. China, looking at a China 7, which would be more Tier 3-like with the U.S., that likely around 25, plus or minus a year. And then Europe as well, looking at regulatory requirements where they would start controlling refueling emissions. You know, there was a large outcome from COVID as they looked at the environmental issues in Europe when The industry was shut down, NOx decreased substantially, but VOCs increased substantially, and those VOCs were basically caused by all the gasoline-using vehicles that were sitting around idle and having multiple days of parking emissions going into the atmosphere. So we feel it's kind of driven the European organization to take some actions to capture those VOCs, and we feel it's going to drive an additional regulatory component into that market.

Great, thanks very much for the call, I guess.

And our next question is from Daniel Rizzo with Jefferies. Please proceed with your question.

Good morning, guys. Thanks for taking my questions. You mentioned pivoting technologies doing low in China and Europe. I was just wondering how much of sales are from that region within that subsegment?

So in general we've got 80% are still in North America and so the remainder 20% is largely from Europe and obviously Asia and within Asia China is the largest piece of that.

Is Evotharm helping drive the growth in those regions or is it just more traditional products?

Actually in the global markets EvoTherm about gaining traction and starting to be adopted is not really significant yet like it is in North America. It's an area that we are really optimistic about in the coming years to promote those benefits but as yet the growth that we're demonstrating here are more from the traditional products mostly on the pavement preservation side or some emulsifier technology that's been adopted for China in cold recycling.

All right, thanks. And then just one final question. You mentioned some kiln replacements and some outages, I think, in the third quarter. And I don't know if this was said before. I was wondering how much of that is pulled forward from 2021, whereas you're doing it now because of the current environment and it won't be necessary for next year or the year after.

Yeah, Dan, we actually had that kiln outage at our Covington facility scheduled for Q2. and due to COVID, we delayed it to Q4. So that would be, as we talk about, the last kiln outage for that facility. So, you know, we effectively got 15 to 20 more years before we have to replace kilns at that plant.

And Dan, on the chemical side, the Warrington upgrade for Glassburg project was originally planned for Q2. You know, due to COVID, we've moved that and that's underway currently. and the outage in the North Charleston plant has always been a Q4 plant outage.

It seems a little counterintuitive, Dan, but I mean, part of the challenge to these, there are obviously two different situations in each segment, but in a COVID environment where you've got contractors running around your plants, interacting with your people, it slows things down a little bit, right? Gotcha.

No, that makes sense, Matt. All right. Thank you, guys.

And our next question is from Chris Capps with Loop Capital Markets. Please proceed with your question.

Yeah, hey, good morning. A couple questions focused on the PM segment. You mentioned lower legal costs is one of the contributors to the higher margins in the quarter. So I'm curious, I assume it's right to assume that 100% of the patent litigation costs are allocated to the PM segment. And wondering if the lower legal expense in three quarters, does that reflect any shift in or is it merely just a timing consideration tied to the dispute or the, I guess, the process timeline, the litigation process timeline?

Yeah, Chris, this is Ed. It's more around the timeline of litigation. We are expecting a little bit higher legal costs in Q4 as we get to a trial occurring in Q1.

Okay. And then I guess, you know, this is Patent dispute over the IP that's expiring in, I guess, a couple years now. With respect to when those patents expire, and then speaking to, this is focused on the patents around the honeycomb application for Tier 3 emission standards, you provided some scope about how, you know, if you extrapolate what the automotive end market is going to look like and a few years from now, there's this shift towards low purge engine technology and that could be covered under new patents. I think the metric is as much as two-thirds of auto sales. At this point, if we're still going in that direction, if the automotive OEs are still going in that direction, you probably have some visibility on that platform. I'm just wondering if there's any sort of visibility on updating us if in fact that anticipated shift to these turbocharged low purge engines is indeed happening, which would therefore make you less vulnerable to a post-patent environment if you end up getting competition.

Yeah, Chris, we do see that trend continuing towards our new low purge patents. A particular product we sell kind of gives us a good indication of Thank you for joining us. strategy is coming into effect.

Okay, and then just finally one quick one on the fourth quarter deferred kiln turnaround in Kentucky. Is there any way to quantify the impact that may have on that segment in the fourth quarter in terms of cost?

Yeah, Chris, we just made somewhere between $4 to $5 million.

Got it. Okay. Thank you, guys.

and our next question is from Barathos Mishwa with Barenberg. Please proceed with your question.

Thank you. Good morning. Can you just remind us as to where we are in terms of U.S. Tier 3 adoption? Is there any incremental that's left for next year? And then also, what's the latest that you are hearing on new regulations in Brazil?

For U.S., they are effectively required to have 100% implementation by 2022 model year. And so if you think that they're actually making those 2022 model years now, so we're seeing, you know, continued kind of purchases of honeycombs, but also completions of platforms so that they should finish it up within the next several months.

Got it, okay. And then just a quick follow-up on this outage at Covington. Can you remind me what exactly you make there while that factory's down? Can you make those volumes elsewhere or you just built inventories in anticipation?

Yeah, no, we built inventory in anticipation of that outage. It was a cold outage for basically 35 days. And so as that plant comes back online, we'll obviously be Restocking our inventories.

Understood. And the last one for me. How are you affected by exchange rate? Is weak dollar a good thing for you?

Yeah. A weak dollar is better for us.

Got it. Thank you.

Then again, he earned The next question is from Jonathan Luff with Eagle Capital Partners. Please proceed with your question.

Hey, guys. Thanks for taking my question. And first of all, John, congrats on the new role.

I think the board made a great decision naming you CEO.

Thank you. Thank you.

So, my first question, Ed, maybe if you could just talk a little bit about the competitive environment in performance materials. Are you seeing anyone new or any new emerging competitors, you know, in the U.S. or, more importantly, in China?

Yeah, Jonathan, this is Ed. I'd say it's kind of relatively the same as it has been over the last five years. So, are still in the marketplace.

Okay, great.

And John, I was hoping you could talk a little bit more about the ability for Ingevity to use sustainability as a competitive advantage. Is it something, you know, what specifically are you trying to address there? And that's something that customers are coming to you or is this your own initiative? How does this benefit

Yeah, no, I mean, look, if you think about it, right, and take a step back, I mean, our products come from an oil, right? It's not crude oil, right? But it's an oil that, you know, comes from trees, right? And historically, we've always competed really in the marketplace based on price and performance characteristics, right? Versus, you know, hydrocarbon oil-based products in a lot of instances, right? They're kind of substitutes. And we obviously also compete against gum rosins and others, but You know, at least for the first time in my professional career, clients and customers are now starting to ask questions around the renewable nature of the inputs because if they want to reduce their own GHG footprints, they have to use raw material inputs that are renewable, right? And, you know, we're just, in a lot of ways, we're kind of at the right place at the right time with regards to our products because of where they come from, right? And we've always known that. What we've learned, though, too, Jonathan, is that if you don't go through the processes of certification, you don't really get the credit in the marketplace because, as we kind of alluded to in our prepared comments, I mean, it's kind of intuitive, right? You can walk around here and right next to a paper mill and edge products come from sawdust, but All that's great, but you don't get any credit in the marketplace if you don't go ahead and get those official certifications, right? So we're in the process of doing that. They're not really expensive. They're a little time-consuming. But that will allow us to have more engaged conversations with our customers around the sort of benefits. And in a lot of ways, I think you're going to see – for lack of a better term, the renewable nature become one of the performance characteristics with which they might evaluate products, right? Versus smell and discoloration, et cetera, right? Some of the other things that they evaluate on. So we're pretty optimistic about our opportunities really across a lot of different products.

Perfect. Seems like a nice tailwind. Thanks so much for taking my question.

And again, I remind you, if you have any questions, you may press star one on your telephone keypad. My next question is from Chris Capps from Loop Capital Markets. Please proceed with your question.

Yeah, I had a follow up and focused on the pine chemicals side more. You mentioned that Chinese gum resin prices have increased in the last month. They had increased a little bit when... I guess sort of after turpentine prices normalized and so the producers weren't going after that turpentine so production came off a bit. I'm just wondering this latest improvement in gum rosin prices do you have a sense for if it's more supply driven like is there fewer trees being tapped because of COVID or is it that turpentine dynamic or is this more a function of improving demand just any sense for What's driving the improvement there, and any sense for the sustainability of that improvement? Thanks.

Yeah, sure, Chris. It is primarily supply-driven. There has been a reduction in production in China, and that has been an ongoing trend as the Thank you for joining us. and we've actually seen quite a nice increase. It's actually over six weeks, it's 15% and the pricing is now back to levels we have not seen since the end of 2018. So it's been a kind of a long slog and we're quite encouraged with the turnaround. We do know that Brazilians are also out and competing in that market and so Thank you for joining us. We'll be right back. The overall pricing environment should certainly be optimistically improved.

Got it. And then the follow up, I guess, would be just, you know, extrapolating on those comments is, is this environment or those conditions is enough to anticipate and maybe an upward bias and then what's been an otherwise sort of beleaguered, you know, poor rising price environment over the last couple of years. Thanks.

Well, the tour market, at this point, it's still tough, but the Chinese gum rosin has always been a pressure on this market, and we can see that from our customers. And if Chinese gum rosin prices stay high, we should be able to get that pricing turned around. It may not be instantaneous, but we're going to Thank you. And

We have reached the end of the question and answer session and I will now turn the call over to Jack Maher for closing remarks.

Thank you for dialing in everybody. We appreciate your interest this morning. We remain very positive about our long-term business outlook and look forward to talking with you again next quarter.

This concludes today's conference and you may disconnect your line at this time. Thank you for your participation.