Ingevity Corporation (NYSE:NGVT) Q1 2024 Earnings Call Transcript

Ingevity Corporation (NYSE:NGVT) Q1 2024 Earnings Call Transcript May 4, 2024

Ingevity Corporation isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Good morning or good afternoon. Welcome to the Ingevity First Quarter 2024 Earnings Webcast. My name is Adam and I’ll be your operator for today. [Operator Instructions] I will now hand the call over to begin to John. Please go ahead when you are ready.

John Nypaver: 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 and can be found on ir.ingevity.com under Events and Presentations. Also throughout this call, we may refer to non-GAAP financial measures, which are intended to supplement not substitute for comparable GAAP measures. Definitions of these non-GAAP financial measures and reconciliations to comparable GAAP measures are included in our earnings release and are also in our most recent Form 10-K. We may also make forward-looking statements regarding future events and future financial performance of the company during this call and we caution you that these statements are just projections and actual results or events may differ materially from those projections as further described in our earnings release.

Our agenda is on Slide 3. Our speakers today are John Fortson, our President and CEO, and Mary Dee 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.

John Fortson: Thanks, John and good morning everyone. Turning to Slide 4, 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 a 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 cost 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 completed the shutdown of our DeRidder site during the quarter, and we are increasingly using oleo-based products coming out of our Crossett facility in 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.

Mary Hall: Thanks John and good morning all. Please turn to Slide 5. First quarter sales of $340.1 million were down 13% due primarily to our repositioning actions in 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 Materials 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 GAAP 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 10-Q, 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 million 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 6, the top left chart shows a key impact of the Performance Chemicals repositioning. As we exit the low-margin end 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 3 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 7, 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 debottlenecking 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 and 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 a longwinded way of saying don’t expect every quarter to pull or 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 8, revenue in APT was $48 million, down 27% to primarily the lower volumes, 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 9 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-third 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 the 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 Crossett 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 million to $80 million to between $50 million 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 million 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 DeRidder 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.

John Fortson: 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 million 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. And 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 DeRidder, 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 oleo-based materials, but the broader markets 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 U.K. and we are excited about the opportunities that business has. Bioplastics will continue to play a bigger role in packaging, including fibers and we are participating in that growth. Road technologies is expected to continue its expansion outside of North America while building on its market-leading presence in the U.S. 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.

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Q&A Session

Operator: [Operator Instructions] And our first question today comes from Vincent Anderson from Stifel. Vincent, your line is open, please go ahead.

Vincent Anderson: Thanks. Good morning everyone.

John Fortson: Hello Vincent. Good morning.

Vincent Anderson: Good morning. Is it fair to infer that from the much smaller difference between your booked losses on CTO resale versus your cash losses on CTO resale that your costs are converging towards that resale price?

John Fortson: 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, yes, we’ll see similar in Q2, but we’ll see more acceleration or more of that convergence in the back half of the year.

Vincent Anderson: Sure. And I mean, I understand that a lot of that is contingent on volume actually pulling that cost to the P&L, but I assume that that difference between–

John Fortson: And listen, Vincent, 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 oleo-based chemistries. There’s a reasonable likelihood that that should be 10% of revenue for that business next year — or this year, sorry. We’re continuing to look at are there other ways for us to continue to service the markets that we’re in with the different operational footprint. So, all those things are on the table. But to get back to your question, I do think that crude tall oil is — the pricing that we pay vis-à-vis what is sort of the secondary market or what have you, will continue to improve over the course of the year, particularly in the back half.

Vincent Anderson: 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 specked in with a customer and they’ll market it, but sales still depend on adoption–

John Fortson: You are getting around, aren’t you there, Vincent?

Vincent Anderson: Well, I mean, you brought it up.

John Fortson: Rich, I’m going to turn it over to you.

Rich White: 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 progression that is being seen associated there with.

John Fortson: I mean, 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, 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.

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

Rich White: Yes, 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 when the rainy season comes on their ability to pave the road.

Vincent Anderson: Okay, all right. Thanks. I’ll turn it over.

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

Daniel Rizzo: Good morning. Thank you for taking my call. Just first a clarification, did you indicate that and I hear right that Industrial Specialties should have a run rate of about a $100 million in sales per quarter for the year? Is that what was said or did I hear that wrong?

Mary Hall: No, Dan. And I probably was battling a cold, so maybe a little hard to understand. With a little — $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 Inspect that the remaining one-third is largely due to selling off finished goods inventory in the markets that we’re exiting.

Daniel Rizzo: And that’s completely done. That’s falling off the inventory?

Mary Hall: There’s some nominal amount left, but most of it in Q1.

Rich White: That was the big slug.

Daniel Rizzo: 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 like from like 2% now or where are we like right now?

John Fortson: Well, you have to be careful with it because some 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, 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.

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

John Fortson: Well, that’s right.

Mary Hall: You’re right. We used to say low-to-mid 40%s and I think we said now we’re at mid-to-upper 40%s. That is correct.

John Fortson: 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-40%s and we’ll do better than that when we can.

Daniel Rizzo: Great. Thanks guys.

Mary Hall: Thanks Dan.

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