Ingevity Corporation Q2 FY2025 earnings call

Management Statement and Operational Highlights:

• Strong execution and profitability driven by Performance Materials (EBITDA margins above 50%) and repositioning in Performance Chemicals.
• Progress on strategic portfolio assessment with sale process for Industrial Specialties business and CTO refinery at advanced stage.
• Recorded a noncash goodwill impairment charge of $184 million for APT segment due to tariff uncertainty and global industrial market weakness.
• Accelerated reduction in net leverage with free cash flow improvement, aiming for 2x to 2.5x net leverage.
• Investments in innovation and Performance Materials to drive future growth, and equipment for APT to improve efficiency.

Segment Performance:

• Performance Materials: Sales declined about $3 million or 2%, with EBITDA margins above 50% for the quarter. Revenue in North America was higher, but offset by declines in Europe and Asia ex China.
• APT (Advanced Polymer Technologies): Sales down 10% due to tariff uncertainty, global industrial market weakness, and plant outage costs. EBITDA was about $1 million for the quarter. Full year revenue expected to be down mid- to high single digits, EBITDA margin between 15% and 20%.
• Performance Chemicals: Sales down 10% due to repositioning actions and wet weather impacting paving activity. Segment EBITDA more than 3x last year's number, EBITDA margin approached 20%, and full year EBITDA margin revised to high single digit to low double digits.

Guidance:

• Raised full year EBITDA guidance to a range of $390 million to $415 million.
• Revised full year free cash flow guidance upward to $230 million to $260 million.
• Maintained sales guidance while navigating macroeconomic uncertainty.
• Expect to host investor update later this year or early next year to communicate portfolio review and long-term strategy.

Risks:

• Tariff uncertainty impacting APT sales and customer order patterns.
• Wet weather affecting Road Tech in Performance Chemicals, impacting sales.
• Global industrial market weakness negatively affecting APT segment.

Q: Congrats on a nice earnings quarter and the higher outlook for the year. Maybe first of all, could you give us an update on the profitability of the In Spec business stand-alone ex pavement where fuel CTO prices are relative to a year ago and also relative to alternative oleos and crude alternatives?

A: Yes. As you know, we don't break out the profitability of that, John. I think where we try to guide people on that is if you look at -- keep in mind the seasonality of pavement, which is a Q2, Q3 story and compare that to Q4, Q1, you get an idea of the profitability -- relative profitability of In Spec. And that's really the best we can do.

Q: I was wondering if you could talk about the investments that you mentioned in your prepared remarks. Maybe some of the opportunities there if those are mostly in the carbon segment or others? And if there's any update on the already ongoing projects that you have?

A: Yes. Thanks, John. So as you know, we've made investments and have a strong partnership with a company called Nexeon. So part of that investment is continued investment into that partnership, which we're very encouraged about. It will allow us to use our highly engineered activated carbon in the EV segment of the business. Also, we've been participating in other applications for activated carbon, which we call process purification. And I think in the past, although we've participated, we haven't been really intentional or haven't developed those channels in an intentional way. And so we're putting some more energy and focus behind that. And I think we'll see some really good results in the future from those investments as well.

Q: On Performance Chemicals, obviously, a really big jump in the margins, maybe bigger than what we were looking for, but a lot of kind of things going on in there. I guess, can you help us to think about what the margin would have been if you didn't have the high-cost CTO running through the P&L? The presumption would be it would have been even higher and probably in the 20s. But can you help us to maybe think about that?

A: So I'll let you -- I'll give you some insight how I think about that. And then we've got Phil Platt here, our Head of Finance and Accounting here as well. So as I mentioned, when we think about the full year, a lot of noise in the first half as we were working through the high-cost CTO. But we did say -- I did say we expect the second half margins to be similar to first half. And again, so that reflects the seasonality of pavement, but also the fact that we will have worked through the high-cost CTO, and it won't be dragging down the second half of the year. Keep in mind that pavement, as I mentioned, had a relatively tough Q2 because of the weather impacts. And I mentioned the strong June and the good momentum in July. So if you think about maybe absent hurricanes and the like, pavement does a bit better in Q3 than Q2, but -- and we don't have the drag from the CTO inventory that gets you to kind of that full year look that I gave. What else am I missing, John? Is there something -- does that help?

Q: You mentioned doing a strategic review, just kind of for the whole portfolio. Is this going to be like an earlier process that once you're done with what you're thinking about with Industrial Specialties that you'll then move on to the next? Or is it something that could happen all at once? I mean, is there ongoing conversations with others about different parts of your business that haven't been previously mentioned?

A: Yes. Thanks, Daniel. So what we mentioned is that we're in advanced stages of the sale process of our Industrial Specialties business and CTO refinery and hopefully have an update soon. We're very encouraged. And at the same time, there's a lot of work going on internally in parallel to look at the entire portfolio. And obviously, we want to be measured here. It's obviously those are some big decisions for the company. And how we're approaching it is just thinking about what are our core competencies, where are we the best owner and then transposing kind of the financial profile of the different businesses, where can we really add value. And that work is ongoing now. We would expect that to be completed. And we mentioned that we'd be providing an investor update, hopefully, by the end of the year, might be early next year, but that work is already ongoing. It also includes a look at where we are -- where we have opportunities to grow. So there may be opportunities. I mentioned one, process purification within Performance Materials, where perhaps we've under-resourced in the past, and we see opportunities for growth. So we'll be able to talk more about that in the second half or later in the year, but that process is ongoing as we speak.

Q: You mentioned that CTO prices now as you purchased them on the open market, I think, is $550 to $600 a ton. I was just wondering what that is as comparing to what your high-cost one was from the beginning of the year and late last year. And if -- and how we should think about it going forward? Is the market long CTO now just given what you've done? Or how we should just think about these costs versus your other inputs in the back half of the year?

A: Yes. The $550 to $600, again, we use that Argus data versus what we were paying before. I think we, at one time, had talked about levels even in the -- that it was 5x current market conditions at a time when the CTO market prices were in a similar area. So the reality is we were -- with the downsizing of our footprint, our CTO purchase requirements, volume requirements also came down. So the combination of requiring less CTO as well as the lower prices is really what you're seeing in those improved results in the first half of this year.

Q: In terms of Performance Materials, you got pricing, again. It seems like the ability to get pricing has been very good over the years. Can you sort of talk about why in the year with down volumes, you've been able to get pricing and how that looks for the second half of the year?

A: Right. So thanks for the question. I think just first touching base on the business itself. We see pretty resilient. Obviously, we're very North American-centric from a business perspective. We sell globally, but the North American market is very important to us, and that's proven to be pretty resilient, whether it's North American auto production or so far, the consumer's buying behavior. With respect to pricing, I think it's just reflective of the value that we're providing to customers. We're providing a highly engineered activated carbon solution. Customers are delighted with the products and the technology. We continue to work closely with those key customers globally. And so that pricing and that value that we're getting back is just reflective, I think, of what we're providing to those customers.

Q: You mentioned doing a strategic review, just kind of for the whole portfolio. Is this going to be like an earlier process that once you're done with what you're thinking about with Industrial Specialties that you'll then move on to the next? Or is it something that could happen all at once? I mean, is there ongoing conversations with others about different parts of your business that haven't been previously mentioned?

A: Yes. Thanks, Daniel. So what we mentioned is that we're in advanced stages of the sale process of our Industrial Specialties business and CTO refinery and hopefully have an update soon. We're very encouraged. And at the same time, there's a lot of work going on internally in parallel to look at the entire portfolio. And obviously, we want to be measured here. It's obviously those are some big decisions for the company. And how we're approaching it is just thinking about what are our core competencies, where are we the best owner and then transposing kind of the financial profile of the different businesses, where can we really add value. And that work is ongoing now. We would expect that to be completed. And we mentioned that we'd be providing an investor update, hopefully, by the end of the year, might be early next year, but that work is already ongoing. It also includes a look at where we are -- where we have opportunities to grow. So there may be opportunities. I mentioned one, process purification within Performance Materials, where perhaps we've under-resourced in the past, and we see opportunities for growth. So we'll be able to talk more about that in the second half or later in the year, but that process is ongoing as we speak.

Q: Your free cash flow looks pretty good. I think you raised that and the goal is to lower debt get your leverage ratio down. So beyond this year, what do you think is the right way to deploy cash going forward if the leverage looks good beyond this year?

A: Sure. And where you finished, getting the debt to our target area, that 2x to 2.5x is clearly our priority. But beyond that, again, investing organically, as I mentioned, we're continuing to do some of that. We continue to see pathways for growth organically and want to give that the priority that it's due. Share repurchases in our past before the leverage got elevated, we were a regular participator in share repurchases. And I think that is something that clearly is on our radar as well in terms of returning cash to shareholders. M&A in terms of our capital allocation priorities, again, not a priority in the near term, clearly, but something that is always on the list to the extent that once we are stable, generating a lot of free cash flow, the other capital allocation priorities are hitting on all cylinders. We will have the flexibility to look at M&A opportunities when they arise.