Ingevity Corporation Common Stock

Good morning all and thank you all for attending the Ingevity second quarter 2024 earnings call and webcast. My name is Brika and I will be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, John Naber from Ingevity to begin. So you may proceed, John.

Thank you, Brika. Good morning and welcome to Ingevity's second quarter 2024 earnings call. Earlier this morning, we posted a presentation on our investor site that you can use to follow today's discussion. It can be found on ir.ingevity.com under events and presentations. Also throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement, not substitute for comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and are also in our most recent form, 10-K. We may also make forward-looking statements regarding future events and future financial performance of the company during this call. And we caution you that these statements are just projections, and actual results or events may differ materially from those projections as further described in our earnings release. Our agenda is on slide 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 and an update on our repositioning efforts in performance chemicals. Mary will follow with a review of our consolidated financial performance and the business segment results for the second quarter. John will then provide closing comments and discuss 2024 guidance. With that, over to you, John.

Thanks, John, and hello, everyone. There's lots to talk about on this call. As you have no doubt seen, we announced further repositioning of our performance chemical segment, a process that started last fall with the closure of our Derivative Louisiana facility. Mary and I will speak in detail about what we have done, why, and where we are going. These recent actions, the termination of the CTO supply contract, The goodwill impairment and the relocation of our oleo refining to Charleston are important milestones to move the PC segment forward and get these issues behind us to create a stronger, more stable PC segment for 2025 and beyond. First, though, let us address the quarter. Turning to slide four, overall, it was a mixed quarter. I'll start with highlighting performance materials. who for the first time ever delivered a fourth straight quarter of 50% plus EBITDA margins. Most simply, the value we get in the market for our products, lower production costs, and increased hybrid adoption are more than offsetting both soft auto production and full BEV vehicle market penetration. Macro trends continue to benefit the segment as hybrids and ICE vehicles are making up a larger mix of all those being produced. And while the cost of energy improved versus last year, what is helping the segment maintain these margins is our plants are using less energy due to operational efficiencies the team has implemented. Both the commercial team and the operations team are ensuring this segment continues to fire on all cylinders. Advanced polymer technologies saw a third straight quarter of volume growth, and year-over-year volumes were up as well. We see encouraging signs in end markets such as electronics and auto, which is driving higher demand for kappa encodings and high-performing adhesives. Europe volumes have begun to bounce back. However, China, and to some extent the U.S., continues to be impacted by slower industrial demands. The team is focusing on markets where CAPA's value proposition helps maximize profitability in a dynamic environment, and they continue to deliver 20% margins. In performance chemicals, the quarter's results were impacted by our reduced exposure to certain end markets as part of our repositioning efforts. Several other factors were at work as well. The first was weather. As you may have heard from other companies, there was a lot of rain across the country in May. You can't pay or do road markings when it rains, so the quarter got off to a slow start. We estimate we missed about two weeks' worth of sales due to this rain. In fact, July was wet as well due to the hurricane-reaching landfall in Texas. If the weather improves and holds up the rest of the summer and well into the fall, we can get those sales back. But road construction projects are weather dependent, so we'll see. We are confident, however, that the pavers, if they can, will work as hard as possible to make up for this lost time. Second, a weaker than anticipated industrial market recovery has impacted the industrial specialties product lines. In the quarter, revenue from our non-CTO oleo-based products was up versus last year. But the pace of this growth is slower than we'd like. Finally, the price we paid for CTO in the quarter remained elevated, and this negatively impacted the segment's profitability. Let's turn to slide five, and we will discuss CTO in more detail. A few weeks ago, we announced the termination of our final long-term CTO supply agreement. This was a critical step to move as quickly as possible to a market cost for CTO, as the price we had been paying was well in excess of what we and our competitors could source in the open market. This creates a clear path for the PC business to improve its profitability and put an end to the negative cash drain these purchases were creating. We said on our last quarterly call that we expected the CTO price we pay under our long-term supply contract to moderate in the second half of the year. But during the quarter, we were informed that the contracted price into the second half will be much higher than expected. As we have discussed before, when we closed our Derrida, Louisiana facility, our remaining long-term supply contract required us to continue buying CTO earmarks at that facility for a two-year wind-down period, leaving us with excess CTO. We were reselling that excess CTO at forecasted losses of $50 to $80 million in 2024. We expected that our contract prices would come down in the second half of 2024 and throughout 2025, and those resale losses would narrow. However, it became apparent that this would not be the case in the foreseeable future. Therefore, we negotiated a buyout of the contract for $100 million, payable in two $50 million installments. Effective July 1st, we are no longer obligated to take CTO from any long-term contracts. We have enough CTO on hand and available via short-term deals to cover our needs through the first quarter of 2025, and we believe there are enough available options in the market to meet our needs next year and beyond. We will still feel the impact of this higher-priced CTO on this PC segment's P&L through the remainder of this year and until the end of the first quarter of 2025 as we work through the higher-cost inventory we have on hand. However, after that point, we will be purchasing and using CTO that we acquire in the open market. While painful, this was an important step for the business to move forward and return to profitability and cash generation. Mary will provide more detail on the impacts to our financial statements in a few minutes. Now please turn to slide six. In order to reduce our cost structure, we are transferring the refining of oleobased raw materials to our North Charleston facility. This will result in the closure of our CrossFit Arkansas site. A key tenet of our growth strategy and performance chemicals is to diversify our raw material streams and grow our oleobase penetration into our legacy markets, while also developing new market opportunities for these oleobase products. This has not changed. Operationally, we've proven the fatty acids we make from soy and canola work. And in fact, we've made great progress in using them as substitutes in existing products like paving and lubricants. North Charleston is where we originally piloted the refining of oleos, and other changes we have made at the site have freed up capacity so we can use existing infrastructure to quickly begin refining soy, canola, and other oleo-based materials, with the added benefit of having post-refinery derivatization capabilities onsite in North Charleston. The North Charleston site has both a refinery that runs CTO but also a smaller secondary refinery, which we call the BNG. This refinery has approximately 25% to 30% of the capacity across it. And with modest investment, that capacity can be increased to 50% across its output, and there is the ability to expand further as the need requires. This capacity is enough to meet the foreseeable demand for oleo growth. By operating both refineries on one site, We get the benefit of higher fixed cost absorption, and we also save on the transport of oleo products from Crossett to Charleston where we derivatize them into finished goods. Crossett's underutilization was causing a drag on the segment's earnings. Concurrent with the Crossett closure, we are reducing headcount to adjust for the smaller physical footprint. With overall annual savings expected to be $30 to $35 million beginning in 2025 when you account for both the closure and cross it and reductions at corporate functions. On slide seven, you'll see a recap of our repositioning strategy, which is to reduce our exposure to low margin cyclical end markets, diversify our raw material streams, and optimize our physical footprint, all of which will create a more profitable and stable business segment. By exiting the CTO contract, we have put this cash drain behind us. And by the end of the first quarter of next year, we will be running the business with lower cost market price CTO, which will enhance both our profitability and competitive position in the market. We said previously that 2024 was going to be a transition year for Performance Chemicals as we execute on this repositioning. While we always continue to assess how best to optimize our businesses, We believe most of the heavy lifting is now behind us to return this segment to profitability. Now, I'll turn it over to Mary to run through the financials for the quarter.