Ingevity Corporation Common Stock

Cool. We'll begin in approximately one minute time. Good morning or good afternoon, all, and welcome to the Ingevity second quarter 2023 earnings call and webcast. My name is Adam, and I'll be your operator for today. If you'd like to ask a question in the Q&A portion of today's call, you may do so by pressing star followed by one on your telephone keypad. I will now hand the floor over to John Naipava to begin. So, John, please go ahead when you are ready.

Thank you, Adam. Good morning, and welcome to Ingevity's second quarter 2023 earnings call. 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.engevity.com under Events and Presentations. Also, throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute, for comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and are also in our Form 10-K. We may also make forward-looking statements regarding future events and future financial performance of the company during this call. And we caution you that these statements are just projections and actual results or events may differ materially from those projections as further described in our earnings release. Our agenda is on slide three. Our speakers today are John Fortson, our President and CEO, and Mary Hall, our CFO. Our business leads, Ed Woodcott, President of Performance Materials, and Rich White, President of Performance Chemicals, are available for questions and comments. Steve Hume, President of Advanced Polymer Technologies, is away on business travel, so John will field any APT questions. John will start us off with some highlights for the quarter. Mary will follow with a review of our consolidated financial performance and the business segment results for the second quarter. John will then provide an update on guidance, followed by closing comments. With that, over to you, John.

Thanks, John, and hello, everyone. On slide four, you can see our highlights for Q2. The team delivered double-digit revenue growth while maintaining mid-20s EBITDA margins, a great outcome in this environment. Three of our four business lines performed well. Performance materials had double-digit growth from last year, and we saw sequential growth as well. We were excited to see that Nexion, the company in which we invested $60 million last year, has announced an agreement to supply silicon anode material to Panasonic, one of the world's leading battery companies. Additionally, overnight, Nexion issued another press release announcing their intention to build a manufacturing plant in Korea, as well as a supply agreement with OCI. Nexion's silicon-based anode solution can increase the energy density of lithium-ion cells by up to 50%, increasing vehicle range and reducing charging time. This agreement validates the promise of Nexion's technology and its progress in development. We are continuing our joint development work with Nexion to include our activated carbon in their solution. This is a great step forward in our multi-pronged approach to finding alternative uses for our carbon. The Advanced Polymer Technologies team continues to manage that business efficiently and effectively, increasing margins into the 20s, even with sluggish economies in Europe and China, APT's two largest markets. While volumes were down in lower margin areas like footwear, We saw volume growth in the strategic areas we identified at our investor day. Bioplastics and automotive applications such as paint protective films. Increasing recognition for the sustainable nature of our technology is supporting growth in bioplastics. Just recently we added to our growing list of biodegradable certifications when our Kappa thermoplastic products were awarded the TUV Austria soil certification for providing biodegradable solutions for agricultural and horticultural applications. Results in the performance chemical segment reflect two very different business environments. Mary and I both will focus on walking you through what is transpiring. Our pavement technologies business delivered a record quarter. Even excluding the addition of Ozark road markings, our legacy pavement business had their highest sales quarter ever. The pavement team is executing the strategy we shared at Investor Day. The team is expanding our footprint globally and generating higher volumes in Europe and South America due to technology adoption. The UK is quickly converting to having one of the highest warmest mix adoption rates in the world, which means less energy use and lower emissions when using our flagship product evotherm. In Brazil, a Petrobras pavement plant is converting an entire refinery to include evotherm. This is a terrific development is only 12% of existing public roads in Brazil are made from asphalt today. And we are also adding new products and technologies to keep expanding our portfolio, both in warm mix and pavement recycling to meet the evolving needs of customers around the world. Our industrial specialties business and performance chemicals, however, had a challenging quarter and faces a tough environment, as we have discussed. Crude tall oil, or CTO, is the key raw material for this business, and the cost of CTO remains near record highs. When we refine CTO, we get equal parts tall oil fatty acid, or TOFA, and rosin. While TOFA demand remains solid, the headwinds we highlighted in our Q1 call remain, namely a teep at China recovery and continued restocking by customers. particularly in our rosin-based products such as adhesives. We are also seeing some adhesive customers shift to lower cost alternatives. As a result, we have slowed down plant run rates to manage the inventory build in rosin, which has negatively impacted plant throughput and the availability of TOFA for sale. If you have followed us for a while, you know this business is cyclical. The difference now is the step change in inflated CTO prices, which we expect to linger for some time. On an annual basis, we expect this to be a $200 million increase in the cost of CTO to what we paid last year. We knew that these costs would increase over the course of the year and had built that into our initial forecast and guidance. However, at that time, we anticipated we would be able to offset this cost pressure to a large extent through price increases as we expected in-market demand to continue to be strong, following the trend we saw into late last year. As we all now know, industrial in-market demand has weakened throughout this year, particularly in our rise in in-markets, but also in many other markets. As a result, performance in industrial specialties has deteriorated, and we are not seeing the offsetting strength in APT and performance materials that we anticipated. To mitigate these pressures, we initiated significant cost reduction actions across the company at the end of second quarter, which Mary will discuss in more detail. In the current economic environment, we will only recover roughly $100 million of the increased cost structure during the year. Our Alternate Fatty Asset, or AFA, transition is critical to offsetting higher CTO costs over the long term, and it continues full bore. We continue to expand production and expect to surpass historic CTO run rates at the CrossFit facility by this time next year. Our AFAs are currently being used in our existing products within pavement technologies and oilfield business lines. In fact, we are building new storage tanks to utilize more AFA in our pavement production. And we are making inroads with potential customers on products that are new to Ingevity. We are also investing in talent to support this transition, adding a lead commercial officer to help accelerate our entry into these new markets. Mary will provide more details on our quarterly performance, and I will cover the expected impact for the remainder of the year and beyond when we discuss our guidance later in the call. With that, I'll turn it over to Mary.