Ingevity Corporation Common Stock

Good morning or good afternoon, all. Welcome to the Ingevity First Quarter 2024 earnings webcast. My name is Adam and I'll be your operator for today. If you'd like to ask a question during 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 call to John Iparva to begin. So John, please go ahead when you are ready.

Thank you, Adam. Good morning and welcome to Ingevity's first 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 .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 10K. 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 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. Mary will follow with a review of our consolidated financial performance and the business segment results for the first quarter. John will then provide closing comments and discuss 2024 guidance. With that, over to you, John. Thanks, John,

and good morning, everyone. Turning to slide four, we had a good, strong start to 2024. Performance materials, revenue and EBITDA were both up strongly, and the segment generated margins close to 54%, exceeding expectations and executing well. This performance is the result of a lot of hard work by the PM team. Volumes were up from a year ago, and the business benefited from higher pricing, improved throughput, and lower input costs. APT performed relatively well this quarter. While revenue and EBITDA were down versus a year ago, they are being measured against a tough comparable period. First quarter 2023 was the last quarter before the stocking began. Positively, though, they have now posted two quarters of sequential volume improvements, and this is hopefully a good sign of a gradual recovery in their end markets. Importantly, despite these lower volumes, they maintain strong margins in the quarter. Performance chemicals is tracking in line with our expectations for our repositioning strategy. The first quarter is a seasonally light quarter before the paving season really kicks in, and it is also being negatively impacted by the costs we are paying for crude tall oil. Our savings targets remain on track. The transition to reduce our reliance on CTO is moving forward as we complete the shutdown of our Doritter site during the quarter, and we are increasingly using oleobase products coming out of our CrossFit facility and existing end markets like pavement and lubricants. In a few moments, I'll review our 2024 guidance and provide some perspective on expectations for the rest of the year. But before that, let me turn it over to Mary for more details on the quarter's results.

Thanks, John, and good morning, all. Please turn to slide five. First quarter sales of 340.1 million were down 13% due primarily to our repositioning actions and performance chemicals, which included a plant closure and our exit from certain low margin end markets. Also contributing to lower sales were continued weakness in China and certain industrial end markets that negatively impacted sales in our APT segment and industrial specialties product line, more than offsetting a 3% increase in performance material sales. For the quarter, we had $64.8 million of restructuring charges and $26.5 million of CTO resale losses related to the performance chemicals repositioning. These charges led to a gap net loss of $56 million. We've excluded the impacts of the restructuring charges and the CTO resale losses in our non-GAAP disclosure and our discussion for the remainder of this presentation. A reconciliation of our non-GAAP measures to GAAP is in the appendix to this deck and also in our earnings release and form 10Q, which will be filed later this evening. Our adjusted gross profit of about $120 million declined 19% and our adjusted gross margin was down 260 basis points to 35.2%, due primarily to the combination of lower sales in performance chemicals and APT and CTO spend that was significantly higher year over year on lower purchase volumes. Adjusted SG&A improved 6% year over year. For the quarter, we realized a total of approximately $20 million of savings related to the performance chemicals repositioning and the other corporate actions taken last year. Of the $20 million in savings, about $5 million is reflected in SG&A and about $15 million in COGS. We are on track to realize our target of 65 to $75 million in annual savings. Our diluted adjusted EPS and adjusted EBITDA declined on lower earnings, but we still delivered a strong adjusted EBITDA margin of 22.6%, reflecting the underlying strength of the company's core portfolio as we complete the repositioning of performance chemicals and exit certain lower margin products and end markets. We estimate our 2024 tax rate will be between 23 and 25% slightly higher than last year. Turning to slide six, a top left chart shows a key impact of the performance chemicals repositioning. As we exit the low margin and markets in PC, the performance materials segment becomes a larger percentage of total company sales, increasing to 43% of sales this quarter. As we discussed last quarter, our actions are improving the company's overall portfolio mix, making it more balanced and improving the margin profile. Our first quarter free cash flow was negative $28.7 million compared to negative $20 million in Q1 last year. Remember that negative free cash flow is more the norm for the first quarter as we're building inventory for the summer paving season. But this quarter's number also includes $19.8 million of cash losses on CTO resales and 7.3 million of cash spend associated with performance chemicals repositioning. While our net debt was lower year over year, our leverage ratio increased due to lower EBITDA. We anticipate leverage will peak in the second quarter before improving to around three times by year end. Reducing our leverage is our number one priority for capital allocation this year. We are in compliance with all of our bank covenants and expect to remain so. Turning to slide seven, you'll find results for performance materials. Sales were up 3% to $145.1 million and EBITDA was up an impressive 12% to $78 million with an EBITDA margin of almost 54%. Truly the business was firing on all cylinders for the quarter. There were many drivers of this performance. Annual price increases went into effect. Our activated carbon volumes were up in all regions. We had no scheduled nor unplanned downtime and our talented engineers completed a series of the bottlenecking projects that improved plant throughput. Also input costs such as energy and certain key raw materials were lower year over year. For the remainder of the year, the segment has scheduled downtime in at least one facility in each quarter. So the benefit we saw this quarter from high utilization rates is expected to be lower going forward and energy and other input costs can fluctuate significantly as you know. On the positive side, auto production estimates are calling for higher production this year versus last year despite softer than expected production numbers in Q1. This is the long-winded way of saying, we don't expect every quarter to post 54% EBITDA margins. As we always caution, quarters can be choppy. For example, last year quarterly margins ranged from 44% to 51%. We continue to expect mid to high 40% full year margins for this segment. Turning to slide eight, revenue in APT was $48 million, down 27% to primarily the lower volume, which we attribute to the continued global demand weakness in many of the segments and markets. As John mentioned in his earlier comments, APT had a strong Q1 last year, but end market demand weakness beginning in second quarter last year. So the Q1 year over year comp is challenging. China demand in particular continues to be weak, negatively impacting one of our biggest end markets in China, which is paint protective film for autos. While China auto production is up, the film is an aftermarket purchase. And due to the economic slowdown, Chinese customers appear to have paused discretionary purchases on items like protective film for their cars. While China remains weak, we are encouraged to see two quarters of sequential volume improvement in APT driven by Europe and North America. However, forward visibility is limited as customers continue to be cautious in their outlooks for the year. Based on discussions with customers and peers, we believe the recovery is likely to be more of a second half event. Despite lower volumes negatively impacting plant throughput, EBITDA margins remained a healthy 20% supported by lower energy, logistics, and raw material costs, as well as improved SG&A as a result of cost saving actions. Should the industrial recovery continue to be delayed, we are confident in the steps Steve and his team have taken to improve business operations. Please turn to slide nine for performance chemicals. Sales of 147 million were down nearly $40 million as we continue to execute the repositioning of performance chemicals and exited lower margin products and markets. We also experienced some softness compared to last year in certain industrial markets, such as lubricants and rubber. These end markets, along with ag chemicals and certain oil field products, are the primary end markets in which we continue to participate. And they represented roughly two thirds of the $101.3 million of industrial specialty sales in the quarter. We believe this is a good proxy for quarterly sales for industrial specialties going forward in 2024. The remaining roughly one third of industrial specialty sales this quarter were of finished goods inventory into the end markets we are exiting. Road technology sales in Q1 were flat year over year, with Q1 being a seasonally low quarter. Wet weather delayed some projects that had been slated for the first quarter in Europe, but the strength of the North American market helped minimize the impact of those delays. We believe that summer paving season will be strong for both pavement and road markings. EBITDA for this segment was negative $10.6 million due to a significant decline in gross margin, driven by higher CTO spend, which nearly doubled from last year, and unfavorable plant throughput due to continued weakness in industrial end markets, which is negatively impacting utilization rates at both the Charleston and CrossFit manufacturing sites. We expect second quarter CTO spend to be similar to Q1 and expect it will trend lower in the second half of the year. Based on the prices we see in our CTO contracts and on the spot market, we are adjusting our 2024 estimate of the losses on CTO resales from between 30 to $80 million to between 50 to $80 million. As a reminder, these losses are not included in our adjusted EBITDA, but are reflected in free cash flow. In addition, we still expect to spend approximately 50 to $60 million this year in cash costs related to the repositioning with about $7 million spent in Q1. As John mentioned, our repositioning of performance chemicals is on track. We have ceased production at our Doritra site. We are realizing the cost savings from the actions we took last year, and we have improved the profitability profile of the company moving forward. And now I'll turn the call back over to John for an update on guidance and closing comments.

Thanks, Mary. Please turn to slide 10. We reiterate our full year guidance of between $1.4 billion and $1.55 billion and adjusted EBITDA between 365 and $390 million. Our first quarter results are encouraging. We expect the performance materials segment and the road technologies product line and our performance chemicals segment will both have very strong years. Auto production that includes our material will remain robust as hybrid production increases. The road paving season is off to a good start and our order book is strong. These high margin, high growth businesses will anchor our performance this year and are at the center of our strategy going forward. An industrial recovery will primarily benefit our advanced polymer technology segment and sales into industrial specialties markets and performance chemicals. I agree with many of our chemical peers that the second half of the year should be better than the first half and that sequential signs of improvement are encouraging. However, many of our peers have yet to see significant enough demand recovery to call for a strong rebound and we are in this camp as well. It is still early in the year and it's an election year. We will see. We are cautiously optimistic about demand patterns and believe APT has upside opportunities to our outlook if we continue to see sequential demand improvement. Sales into the industrial specialties markets will remain challenged due to the high price of our CTO derived products versus substitutes available in the market. By closing to Ritter, we have exited many of our low margin markets but we do have some residual exposure. We are making significant progress in sales of our oil-based materials but the broader market's weakness is not helping us accelerate those efforts. As we said last quarter, we will be very disciplined in cash management and are reducing capital expenditures and other capital allocation strategies while we focus on deleveraging to our more normalized historical levels by year end. As we move through the remainder of the year, we are focused on completing our business transformation and the positioning the company for more stable and sustainable profitability. We will continue to adjust our footprint and cost base if necessary to respond to any adverse changes from our base case. As I close, there are a lot of reasons to be excited about Ingevity in 2024 and beyond. As a management team, we are committed to delivering on the strategy we have laid out, especially as it pertains to performance chemicals repositioning. Our results in the first quarter show how we are tracking to those goals. We also recently completed a comprehensive review of our APT business in the UK. We're excited about the opportunities that business has. Bioplastics will continue to play a bigger role in packaging and clothing fibers and we are participating in that growth. Roe Technologies is expected to continue its expansion outside of North America while building on its market leading presence in the US. And performance materials will continue to be the market leader in gasoline vapor emissions controls, reaping the benefits of the popularity of hybrids and consistently delivering strong margins and growth for us. With that, we'll turn it over for questions.

As a reminder, if you would like to ask a question today, please press star followed by one on your telephone keypad now to enter the queue. We're preparing you to ask your question. Please ensure you are unmuted locally. Now our first question today comes from Vincent Anderson from Stiefel. Vincent, your line is open. Please go ahead.

Thanks, good morning everyone. Hello Vincent, good morning. So, good morning. Is it fair to infer that from the much smaller difference between your book losses on CTO resale versus your cash losses on CTO resale that your costs are converging towards that resale price?

Not exactly yet, but as we mentioned on the call, I mean, we do expect to see our situation improve in the back half of the year. I mean, our estimated costs for Q2 are down slightly from where we were in Q1, but we do expect that. Similar. Yeah, we'll see similar in Q2, but we'll see, you know, more acceleration or more of that convergence in the back half of the year.

Sure, and I mean, I understand that a lot of that is contingent on volume actually pulling that cost through the P&L, but you know, I assume that- That's right, and listen,

as I mentioned in my closing remarks, I mean, we will continue to assess our options with regards to CTO and how that works, right? I mean, we are, as you know, are pushing pretty hard on oleobased chemistries. There's a reasonable likelihood that, you know, that should be 10% of revenue for that business next year, or this year, sorry. You know, we're continuing to look at, you know, are there other ways for us to continue to service the markets that we're in with a different operational footprint? So all those things are on the table.

Okay,

all right. Let me get back to your question. I do think that crude tall oil is the pricing that we pay -a-vis what is, you know, sort of the secondary market or what have you will continue to improve over the course of the year, particularly in the back half.

Sure, okay, fair enough. That's helpful. And then just quickly, could you give us maybe an update or details that we didn't get into before on that paving agreement in Brazil? Like is this that you've been spec'd in with a customer and they'll market it, but sales still depend on adopting it. You are digging around,

aren't you there, Vincent?

Well, I mean, you brought it up. Rick, don't turn

that over to here.

Hey Vincent, this is Rich White. Yes, we are progressing well with this customer that you have uncovered in Brazil. They have transitioned one of their sites totally over to our technology and we're happy with the progression that is being seen associated there with.

We've got, obviously there's competitive information, Vincent, but what I will say is this is a very large opportunity with a very large company down there. It's very encouraging that they're looking at our technology predominantly because it brings a lot of, you know, not only performance attributes, but also production advantages, because you're doing this at warm versus high temperature mix. So that's a big opportunity and we will continue to work on it.

Great, and actually just a quick clarifying question on that one for when it shows up. Is Brazil, Brazil would be opposite season or is it more dependent on rain rather than temperature for them?

Yeah, that's a great question, Vincent. It's more dependent on the rainy season. You can really pave all year in Brazil, but it depends on how, when the rainy season comes on, on their ability to pave the roads. Okay, all

right, thanks, I'll turn it over.

The next question comes from Daniel Rizzo from Jefferies. Daniel, your line is open, please go ahead. Good morning,

thank you for taking my call. Just first a clarification. Did you indicate that, and you're right, that industrial specialties should have a run rate of about 100 million sales per quarter for the year? Is that what was said or did I hear that wrong? No,

no, Dan, and I'm probably was battling a cold, so maybe a little hard to understand. With 101 million sales in the quarter, and what I said was about two thirds of that is the run rate that you should expect going forward for sales for InSpec, that the remaining one third is largely due to selling off finished goods inventory in the markets that were exiting.

And that's completely done, that's selling off the inventory.

There's some nominal amount left, but most of it in Q1. That was the big one.

So, and you indicated, I think you wanted to get to 10% sales from oleo-based products, but I think by the end of the year. I don't know if you can disclose this, is that up from like 2% now, or where are we right now?

Well, you have to be careful with it, it's just one of its product substitution versus sort of new market sales, right? So, we are selling modest levels of oleo-based stuff, we've got a lot of testing going on, and certification, et cetera, right? But when you kind of roll it all up across all the businesses, you get to a number that's not too far from that.

Okay, okay. And then finally, just again, coming back to the PM, even a margin of 54%, I realize you said that don't expect that every quarter, but I mean, high 40s, low 50s is now the norm, because I thought, I could be wrong here, like a few years ago, low 40s was kind of what we were hoping for, and now we've obviously moved well beyond that.

Well, that's right. You're right, we used to say low to mid 40s, and I think we said, now we're at mid to upper 40s. That is correct. Okay,

we've always said, Dan, look, we will do everything in our power to maximize the profit of that business every quarter. You have to understand that it has some lumpiness to it based on when we take outages, when Chinese New Year comes, and when they pre-buy, there's just a lot of moving parts, so you can't take one quarter's margin and extrapolate it across the year, good or bad, right? So we set ourselves a long-term target of being in the high 40s, and we'll do better than that when we can.

Okay, thank you,

guys. Thanks, Dan.

The next question comes from John McMelty from BMO Capital Markets. John, your line is open, please go ahead.

Yeah, thanks for taking my question. So I guess the first one, we heard from the EPA kind of a new PFAS kind of level going forward, and some of the solutions, at least early on, look like from a water table perspective, it's gonna be tied into activated carbon or carbon in general. I guess, can you speak to the conversations that you're having there, and if it's resulting in any early demand flow, or is that something more on the come as we kind of look through whatever, the end of this year into next year?

Yeah, John, this is Ed. You know, obviously, as you mentioned, it's a big deal around the country at this point with PFAS and PFAS. Each carbon that's used for these have unique chains and molecules, and so you really have to test the product first to see whether it's got efficacy for the particular PFAS or PFAS or PFAD that you've got in the system. And so, you know, it's, we see, you know, that opportunity is something for us to do with our powdered activated carbon products, but, you know, we're really trying to make sure that we maximize the sales rate, as well as the profitability as we go into those markets.

Got it, okay, that makes sense. And then just a question on the PM business. Can you speak to the pricing environment that you're seeing and how much that contributed to the margins just first, you know, running without downtime? Because again, we've seen, you know, we've seen periods when you haven't had much downtime, and we haven't seen margins quite like this, so just wondering how much pricing might have contributed to that.

Yeah, John, you know, for us, we look at it for year over year, year over year opportunities for us. And so we continue to add price mid single digits as we move forward throughout the year. Sometimes it will be lower or higher, but we, you know, we try to make sure that we're continuing to capture the value that our products do

for the products that we have. And when you think about it, most of that price increase really sits on the activated carbon itself and not so

much on the honeycomb. So if you're building your model of time, what do you think about that?

I think

prior quarters, I'll

chime in here, prior quarters, we were talking about process purification when auto production was a bit depressed. Now auto production's on the rise, so you're getting that mixed benefit as well from process purification applications into the activated carbon for autos. And a good piece of that margin upgrade is related to that mixed upgrade.

John, I would actually encourage you so, as I was driving in this morning, I was listening to CNBC and they were talking about Fords, I guess either monthly or quarterly sales numbers, right? And,

you know, the headline

numbers like, well, ICE is down, traditional ICE is down, and EVs are up, right? But ICE was down some percentage, EVs were, you know, all electric EVs were up some percentage, but hybrids were up 59%, right? And a hybrid is for us basically another internal combustion engine. So, and those were sales, right? And then they came and actually talked about, because you could argue that a lot of Fords EVs, so all electric sales, were them trying to clear inventories by cutting price on the lots to get the Mustangs and all that stuff moving, right? So, we look at obviously what drives us is production, right? But you can look through, and I would encourage you as you guys think about this to understand that dynamic, because I thought that was a very telling set of statistics, right? You've got EV sales up, but they're clearing high price stuff, cutting price, trying to clear their inventory, where they're building are in hybrids. And that is very, very encouraging for us. And we expect that trend to continue and not be just at Ford, right?

Got it. No, that's very helpful call it. Thanks very much.

The next question comes from Ian Zafino from Oppenheimer. Ian, your line is open. Go ahead.

Hi, great. Thank you very much. Wanted to ask you, I guess on the previous question on the hybrid side is, you know, what you're seeing in the market very much actually reflects what you guys are saying about hybrids doing much better. But when you talk about it being, let's just say similar to an ICE vehicle, I think those were yours or something similar. Is that because the OEs are using common parts for both ICE and hybrid? Or basically, why is that happening? Because I thought the understanding was that hybrid vehicles would have smaller tanks and therefore lower need for activated carbon. Is that the case? And if that's not the case, kind of give us a little detail on what's going on there.

Thanks. All right, then. Yeah, Ian, it's Ed. With hybrids, you've got relatively small vehicle with small gas tanks. As it comes around to fill up those gas tanks, you have to kind of depressurize the system. And so you need that same amount of activated carbon on that fuel tank. As they depressurize the fuel tank, it rapidly goes into a canister system where the activated carbon captures it. So it's almost, you know, from my perspective, we also have some honeycombs and carbon on those systems, depending on the mechanism that each individual OEM is trying to do for those vehicles. So, you know, I still like the hybrid vehicle. It's really gaining share. It's up, you know, if you look at cross Q1 plugin hybrids and hybrids were up 320 basis points. And so you see kind of just the, as people are looking for what they're gonna buy next, they're really excited about the hybrids and the plugin hybrids.

And

when you think about

it, a hybrid

represents a very good solution for most consumers, right? I mean, I use myself as an example. I live about 10 miles from the office, right? So I can go back and forth from work running the electric, right? But when I need to take the long trip to take my kids somewhere or whatever, right? Then that you have that flexibility and it removes that range anxiety. So, you know, but 95% of the time it's running electric, right? And so, you know, I think consumers, when you look at that versus relative price point of these things, right? Consumers are saying, well, this makes the most sense, right? And we're just benefiting from that.

Understood, okay. And then, you know, on the AFA push, I know there's a lot of testing certification. Maybe he can give us an idea of how that's going maybe versus expectations or success rate and along those lines as far as just color on how that's going. It's

just a, Ian, it's just a very slow process, right? I mean, I, you know, we unfortunately don't control it, right? It's one of those few variables that we can't really control. You know, we have a very active dialogue with the regulators. We're talking to them almost continuously. So, you know, we are, what we're doing is we're continuing to work with customers to try and drive and get them interested and test. And then we obviously put these things into the certification process. Where we're having the most success, it really, frankly, is some in our, mostly in our pavement technologies business, some other commercial, you know, industrial applications, oil field and others, but it's encouraging because, you know, as these certifications and we're able to clear, I mean, I think we're gonna see us be able to have more success. But look, we're managing it. We're going as fast as we can. And we feel good about the progress relative to, you know, what we can actually do.

Okay, great. Thank you very much.

The next question comes from Sean Tanwantung from CGS Securities.

Sean, your line is

open. Please go ahead.

Hi, good morning and thank you for the questions and congrats on a nice Carbon Materials quarter. I was wondering if you could talk a little bit more about the mix shift towards hybrids and possibly away from large trucks and SUVs where I think you've traditionally had more content. Has that factored into what you've seen in the quarter and are the ASPs on the hybrids comparable to the content, excuse me, the content levels there comparable to what you saw in the larger vehicles?

Yeah, so, you know, we love F-150s. We love full-size trucks. We have a significant amount of content on them because they have large fuel tanks and generate a lot of vapors coming out of them. But that being said, even with smaller vehicles, the heat of the vehicle can drive more emissions coming out of the fuel tank as well. So it depends really on, you know, the type of vehicle and the design that they've got and the space that they have to have. And, you know, in a lot of cases, they have to put additional content on a canister with additional honeycombs so that they can meet the requirements that the EPA has in place.

Okay, got it. And then just a quick question on the industrial specialty business. I was wondering if you could comment on the profitability on the two-thirds of that $100 million, if you're making any money on that, if it's relatively neutral to the... It works against

us.

How would you want it?

We would have been better if we didn't have it. The source of the material, John.

It's fair to say it's loss-making then. Yep.

No, we're talking about the two-thirds

that

we're keeping. We're talking about the one-third that we gave up. You're talking about the one-third or the two-thirds, John? No,

the two-thirds. I know the one-third isn't so great.

Yes, the two-thirds is the stuff that's making money. Yeah, right. Yes. Right, sorry about that.

Make sure you get that straight. We would have preferred... Is it possible to quantify the degree of profitability? What's that?

Is it possible to quantify or ballpark the degree of profitability on those sales?

No, we don't get into EBITDA at the product line. It's too convoluted,

John. The best way to describe it is that the two-thirds that we kept or that Mary's referring to is stuff that we expect to be recurring. These are markets that we're gonna continue to participate in. The one-third that came out of the Doritra wind-down was effectively loss-selling because we were exiting those markets. And as we talked about, we're exiting markets that are lower margin, not things that we consider attractive going forward, right? But you're gonna have a hard time with that, John, in this quarter, because this is the first quarter before things get rolling.

Right, and I understand that the performance chemicals results for the next couple of quarters will be hard to see in SPAC because paving season kicks in and you've got rogue technologies. And their profitability profile kicking in. But really, all we can say is the two-thirds that we kept, we kept it because it's making money.

Fair enough, thank you.

Next question comes from Mike Sisona, Wells Fargo. Mike, your line is open, please go ahead.

Hey, nice start to the year. I guess for performance chemicals, is the way to look at it, if you add back the 26.5 million loss to EBITDA and that net number is kind of what the ongoing entity is sort of producing. So it's kind of a 10% EBITDA margin for Q1, but that should scale up as rogue technologies, kicks in gear in 2Q and 3Q?

I don't think that's the way to look at it. I mean, I would argue the other way, right? Meaning that if you wanted to look at it from a cash basis, right, the business lost about $30 million this quarter, right, the negative 10 of EBITDA loss plus the, right? Yeah, plus the CTO. Right, the CTO resell. Now we are, and you'll see this in the 10Q and all of Phil Plait's incredible disclosure, but we are, the excess CTO that we are buying, we are going ahead and marking that to market or what we think is a more reasonable price. So you're gonna see that run through as sort of a non-cash charge that will fall through, not in the EBITDA, but in the other income and expense, right, and also in the statement of cashflow, right? The CTO that we're running through, we're running through a cost and that's gonna impact the profitability of the segment, right? So you just have to kind of look at those. When I look at it, right, and then we offset that with the sales, right, the CTO that we do. So you look at this quarter, we had kind of $20 million of cash losses. That's a function of the hit that we were paying to our supplier offset by the sales that we were able to make in the market and they were not one for one. So, but in the quarter, we lost $20 million on that sort of netting out. And then on top of that, there was about a $6.8 million adjustment as we took the right down on the excess that we're still holding to bring it down. So going forward through our P&L and our statement of cashflow, to the extent we do do resales now and we get better than what we've marked it to, it'll be up or down, but it will be less volatile, right? But you need to understand that we're gonna continue to be taking excess CTO for a while. So you're gonna see that run through, right? No, I understand, okay. We don't, from an EBITDA perspective, these are not our ongoing primary operations. So it's not included in the EBITDA. This is not a business that we're in, right?

Right, right, no, I understand. And then I apologize if I missed it, but for performance materials, what do you think the sales growth is gonna be this year?

Well, we don't break it out by, but I think we expect sales, I mean, you can look at the first quarter, you can look at what we did last year. We expect our sales to continue to grow at a pretty healthy clip, right? Maybe not as strong as last year, but certainly from- It's

tied to auto production. But it's tied to auto

production, and we

see that improving, right? In Q1, actually, auto production was a little bit softer than had been originally expected. So Ed's results definitely benefited from that price increase that we talked about as well. Going forward, the auto estimates are expected to strengthen throughout the year. The production is expected to strengthen throughout the year, and we should see the benefit of that.

I mean, we sort of, you know, we've said this before, Mike. I mean, we sort of directionally track IHS. Now, we obviously look at a lot of different sources, banks, economists- Customers. Customers being the predominant input, right? And then we look at a calculation of, you know, ice slash hybrid production by region, right? And then that kind of gives you a direction of what we think things are gonna look like, right?

Got it. And then last one, APT. Do you think we've bottomed here and start to get some sequential improvement in sales, or we still got a little bit of a headwind in QQ before hopefully things get better in the second half?

So we did see two quarters actually in a row, sequential improvement. So we are hopeful that, you know, we are at the bottom. I'd like to see another quarter or so and see that momentum continue. But clearly they did take a hit from the global slowdown, industrial demand weakness, but they have been able to generate two quarters of

sequential improvement. Right, and you know, everything like I would say is, we are very proud of

the margin. Because we have these kind of falloffs in volume. Getting your cost structure to reflect that and get your margin in position is not a simple undertaking. Now, obviously they were benefiting from energy, but I would argue that might have been an artificial, you know, negative a year ago, right? So, but for them to be able to kind of grapple with this and keep their margin percentages where they are, that took a lot of hard work. You know, with regards to the industrial economy, we look at it and we're encouraged, as Mary said, but we're also just not gonna call it until we see a little more time, right? It's been fragile, it's been bouncing around the bottom, looks good, feels good, but

we're just not gonna call it till we get a little more time under our belt.

And

it was volume improvement,

which is what we've been keying off of to try to assess whether we're seeing a healthier demand environment going forward.

Got it, okay, thank you.

The next question comes from Chris Capsh from Loop Capital Markets. Chris, your line is open, please go ahead.

Yeah, good morning, I have a couple of follow-ups. First on InSpec, so the business that you're exiting, I understand the losses and obviously the ability to get pricing there is just not great and it's probably the most competitive, but could you just characterize your ability to get pricing in the loop capital markets? InSpec business that you'll be sticking with, because you still have this CTO inflation.

Yeah, so the biggest issue really centers around rosin pricing, right? And rosin, as you know, our rosin is mostly in sort of what I would call industrial applications and highly vulnerable to substitution, right? It doesn't help that some of our competitors in traditional crude, tall oil-based rosins have a better cost structure than us, but we have to respond to that and we have to deal with that, right? And that's because of the CTO. But most of the stuff that we exited, and this is predominantly a function of Derrida, Derrida was really run as a rosin site, right? And that's really where it made its money. And then it also had the advantage of selling some TOFA into the oil field markets, right? Because it's obviously producing TOFA. But when you look at that in the aggregate, you have to kind of ask yourself, when you run a ton of CTO and where it's in markets or position, does it make economic sense for the enterprise, right? We feel like what the footprint that we have today is more in balance, right? That's predominantly because the Charleston plant's primary in-market is road technologies, right? And so those are the markets that it's serving. It does have some rosin that comes out that aren't needed in those markets, but things like Ozark help with that because they use rosin, right? But generally speaking, it makes that rosin problem a lot smaller relative to the value that you get from a TOFA. That's the best way to describe it.

Yeah, I got it. Makes sense. And then the follow-up on the PM segment was around the hybrid discussion. I'm just curious if to the extent you're getting mixed lift, is there any way to characterize how much benefit you're getting from your products for the new technology where you have IP, the low-purge engine technology? I think that's at play both in hybrids as well as maybe just advanced model year platforms.

What percentage of your sales are covered around the new patent today?

Yeah. Probably the best way to... Within North America, there's a high level of patent protection across those, right? It's a tier three requirement, right? Which you're looking to get extremely low levels and the canisters themselves with activated carbon help, but you need, in a lot of cases, honeycombs. Some of those honeycombs vary on their content and efficacy and we help the OEMs and the tier ones

to

help design the canister system that they're looking to put our products into, right? And that's important,

Chris, because most of this hybrid push is in North America today.

Yeah, with China 7 coming along... Eventually, we'll benefit

in China, right?

Appreciate the color, thanks.

We have no further questions, so I'll hand the call back to John and I, Barbara, for closing remarks.

Thanks, Adam. Well, this concludes our call. Thank you all for your interest in Ingevity and we'll talk with you again next quarter.

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

Well, this concludes our call. Thank you all for your interest in Ingevity and we'll...