Ingevity Corporation Price & Performance (NGVT)

Our business leads Rich White, President Performance Chemicals and Steve Hume, President of Advanced Polymer Technologies are available for questions and comments. Ed Woodcock, President of Performance Materials is traveling. And his place to answer questions is Jonathan MacIver. Our VP of Global Commercial for Performance Materials. Luis will start us off with some highlights for the year. Mary will follow with a review of our consolidated financial performance, and the business segment results for the fourth quarter and full year. Luis will then provide closing comments and discuss 2025 guidance. Our prepared comments will focus on full year results. But we are happy to take questions on the quarter during the Q and A portion of the call. With that, over to you, Luis.

Thanks, John, and good morning, everyone. Please turn to Slide four. 2024, we took proactive steps to improve performance and enhance shareholder value. These actions, which are already delivering results, have significantly altered the way we perform as a company. First, we continue to reposition Performance Chemicals. This segment is now focused on higher margin than markets. With improved raw material cost structure. Which will be more visible once we consume the remaining high cost CTO inventory. Second, we accelerated execution of our strategy. Performance Materials had a record year in both sales and EBITDA. Surpassing margins of 50%. And there is momentum behind this business as we see ICE vehicles continue to become more fuel efficient and consumer preferences trending towards hybrids, which require more advanced carbon technology. We're also making progress in developing new outlets for our carbon in silicon anode batteries. Through our investment in Nexion, Performance Chemicals margins improved in the second half of twenty twenty four. We protected share and volume growth in APT in a difficult industrial environment. As a result, we we generated over $50,000,000 of free cash flow As we committed, we paid down debt and ended the year at 3.5 times net leverage. [indiscernible] Third, we recently announced plans to explore strategic alternatives for our industrial specialties product line, North Charleston CTO refinery, Industrial Specialties has a great team and we're extremely proud of the work they are doing.

Nevertheless, we are assessing Ingevity is the best owner of this cyclical business. We expect to have this assessment completed All these accomplishments would be hollow without a good safety record that directly impacts the men and women of our team at facilities around the world. I am very pleased to share we achieved our goal to reach top quartile in personal safety performance in the American Chemistry Council's responsible care benchmarking Even with all the changes we saw during 2024, the teams made safety a priority and I couldn't be more proud of everyone's hard work. We were also recently named as one of America's most responsible companies of 2025. By Newsweek Magazine for the third consecutive year. We are committed to advancing our mission to purify, protect and enhance the world and are proud to be recognized by our efforts. Lastly, the search for a permanent CEO is progressing well. While the search is in progress, I continue to be focused on executing our business strategy, which is showing results. Now, I will turn it over to Mary will go through the 2024 numbers. After that, I'll be back to discuss 2025 guidance.

Thanks, Louise, and good morning, all. Please turn to Slide five. Full year sales of $1,400,000,000 or down 17% from last year's sales of almost $1,700,000,000 dollars Performance Materials reported record sales but that increase was more than offset by the almost $300,000,000 drop in sales in Performance Chemicals which was primarily due to the exit of lower margin end markets in industrial specialties. Also contributing to the sales decline were lower sales in Road Technologies due primarily to adverse weather conditions and in advanced polymer technologies where increased volumes were more than offset by unfavorable mix and price concessions in certain markets, reflecting continued weakness in industrial demand and competitive pressures. We ended the year with a GAAP net loss of $430,000,000 which reflected several non recurring charges that are primarily related to our repositioning actions. These charges totaled $688,000,000 and included a goodwill impairment of $349,000,000 restructuring charges of $186,000,000 a $100,000,000 termination fee for a long term CTO supply agreement and $53,000,000 of losses on the resale of excess CTO. We have excluded the impact of these charges 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 ks, which will be filed this evening.

Adjusted gross profit of $521,000,000 dollars was down 4% to last year, but gross margin was higher by five ten basis points, reflecting Performance Materials improved profitability and our strategic repositioning of Performance Chemicals. Adjusted SG and A dollars but the percent of sales increased year over year due to the steep drop in sales I mentioned earlier. Adjusted EBITDA dollars were down on lower sales while adjusted EBITDA margin improved three fifty basis points to 25.8% as our repositioning actions had their desired effect. Driving a higher mix of revenue from our more profitable businesses and the savings we realized from cost reductions. Please turn now to Slide six. In the upper left chart, you can see how our repositioning actions are changing the business composition of the company. Industrial Specialties, our most cyclical product line is now less than 20% of overall sales when historically it represented roughly one third to almost 40% of total company revenue. Our most profitable segment Performance Materials now represents over 40% of total company revenue improving the company's overall margin profile.

This is a direct result of our strategic strategic actions in Performance Chemicals. In the upper right, you see we generated free cash flow of $51,000,000 for the year, much stronger than we guided in October. A key contributor to this performance which resulted in a benefit of more than $50,000,000 Strategic inventory management was a major driver of the working capital improvement and the reduction in inventory was in finished goods and not related to the high cost CTO inventory we have on hand. And as a reminder, our free cash flow included the impact of rough of cash outflows related to repositioning actions of which approximately $180,000,000 won't recur in 2025. However, we also do not expect to have a benefit from working capital reduction in 2025 and have taken all these moving parts into account in our free cash flow guidance of between $220 and $260,000,000 In the chart at the bottom right, you'll see that we were disciplined with cap Back spend as well and 71% of our spend was on maintenance and safety, health and environmental. We expect CapEx to be lower this year in the $50,000,000 to $70,000,000 range due to our smaller footprint and also the fact that our remaining facilities have benefited the last couple of years from debottlenecking and related incremental maintenance [indiscernible] We used free cash flow and cash on hand to reduce debt by $66,000,000 which brings me to the chart on the lower left showing our net leverage ratio.

I'm happy to say we ended the year at 3.5 times net debt to adjusted EBITDA also better than expected. We continue to focus on free cash flow generation and debt reduction and now expect to be below 2.8x net leverage by the end of twenty twenty five. We also expect our full year 2025 tax rate will be between 2224%. Turning to Slide seven, you'll see results for performance which delivered record sales EBITDA and EBITDA margins Sales growth of 4% outpaced global auto production, which was up about 2%.

The increase in sales was driven by a higher volume and improved price and mix. There are two components to mix that are key to understanding this segment. Auto mix is important as larger vehicles such as trucks and SUVs have more of our content. And the more hybrids and ICE vehicles in the mix versus all electric vehicles, the better for us. The regional mix is also important. North America, which is nearly 50% of Performance Materials sales, is our most profitable region due to the typically larger size of vehicles and this region also has the highest emissions control standards in the world so vehicles typically require more of our product. Asia Pacific is also an important region.

We representing about 40% of total performance material sales. Within Asia Pacific, about 50% is China, and the remaining 50% is primarily South Korea and Japan. These countries have strict emissions control standards or strong export markets, where our carbon plays an important role in meeting regulations. Europe is our least impactful region due to the regulatory favoring electric vehicles and also because Europe behind North America and Asia. As an aside, in our 10 ks, which we released tonight, we show a more detailed breakdown of revenues by geography for all of our [indiscernible] EBITDA for Performance Materials increased 11% to $319,000,000 with EBITDA This record result was primarily driven by operational improvements enabled the plants to run more efficiently which reduced our input costs by using less natural gas and also improved yields. Our team is laser focused on continuous improvement and this is a great success story. Given natural gas prices in 2024, were by some reports the lowest in more than a decade, input costs this year are expected to be higher but based on our normal price increases, and expected volumes and mix, as well as some increased spend on R and D we believe segment margins will be around 50% for 2025.

Please turn now to Slide eight. APT generated higher volumes year over year as the team made progress in end markets such as elastomers, Adhesives and coatings, but unfavorable overall product mix and selective price concessions contributed to a revenue decline of eight The segment benefited from lower energy costs and an improvement in utilization rates as a result of the higher volumes but these cost savings were more than offset by the revenue decline resulting in EBITDA of $35,200,000 dollars and an EBITDA margin of 18.7%.

We believe the actions we've taken with will produce margins of around 20% in 2025. Also, when global demand improves, we believe that tailwind will support not only existing markets, but also spur innovation in more profitable high growth potential markets such as bioplastics used in food packaging and apparel that could improve margins further. Please turn to Slide nine for Performance Chemicals results. As a result primarily of our repositioning actions, revenue in the segment of $6.00 $8,000,000 dollars was almost $300,000,000 lower than prior year.

A 33% decline.

Approximately $210,000,000 of the decline in revenue reflects the exit of lower margin end markets in industrial specialties as we continue to focus on maximizing profitability. The remaining sales decline was due primarily to lost sales as customers sought alternative suppliers in light of our repositioning actions, and lower ROADTEC sales attributed primarily to adverse weather in key U. S. States. PC generated EBITDA of $14,700,000 for the year significantly better than our guidance October of breakeven for the segment. This better than expected outcome was primarily due to an acceleration of the savings from repositioning million dollars to $75,000,000 of savings in 2024, but I'm happy to say that we realized $84,000,000 of savings during the year. The remaining savings of are expected to be realized in 2025. We also previously indicated that we expected to consume the remaining high cost CTO inventory by the end of Q1 twenty twenty five, But given the continued weakness in industrial demand, we now expect to fully consume that CTO in Q3. 2025. In 2025, we expect Performance Chemicals to generate EBITDA margins in the mid to high single digits, primarily reflecting the cyclicality of industrial specialties which continues to be challenged by weak industrial demand and competitive price pressures.

We have reduced our prices to align with market prices and this will mostly offset the benefit of lower average CTO costs in the latter part of the year. We expect the higher margin, more stable Roadtech business to return to normal growth in 2025, helping to improve segment margin. In summary, we're very pleased to see the benefits of our repositioning actions translating to improved earnings margins and cash flow, We expect strong free cash flow generation in 2025, which we will use to drive leverage to below 2.8x from the current 3.5 times. Many thanks to our dedicated team as the company is well positioned for near term and future value creation. And now I'll turn the call back to Louise for an update on guidance and closing comments. Thanks, Barry. Please turn to Slide 10.

As I have said, while I'm in the CEO position, team and I are keenly focused on execution And for 2025, that includes generating sales between $1,300,000,000 and $1,400,000,000 EBITDA between $400,000,000 and $415,000,000 I have also said I'm committed to reducing our debt. And I expect we will generate between $220,000,000 and $260,000,000 of free cash flow which combined with our improved EBITDA should enable us to reduce net leverage to below 2.8 times by the end of the year. As a reminder, this guidance does not include any potential impact from the exploration of strategic alternatives for industrial specialties in the North Charleston's CTO refinery. In summary, I am excited about the progress we have made and believe Ingevity will continue to improve. With EBITDA margins in the high 20s and businesses generate very strong cash flow. Which will provide the flexibility to allocate capital across a variety of avenues. I look forward to leading these efforts until my replacement is named. In the meantime, the company and the Board remain focused on maximizing value to our shareholders through their priorities I have previously communicated. With that, I'll turn it over for questions. And our first question comes from John Tanwanteng from CJS Securities.

John, your line is open. Please go ahead. Hi, good morning. Thank you for taking my questions and quarter and pulling in costs. Question on the pricing in the Performance Chemicals business. Are you already at the pricing that you to be at when the high priced C2 inventory runs out or is there still a further leg down that you can take when that does come out and you can use loan to put cost. Hi, John. Good morning. Yes, we have stayed competitive with the market since the the prices of CTO for most people have come down. We just have to be competitive. So the way I would describe it is that our current prices reflect the current market price of CTO. And as such, if CTO stays at these levels, we're pretty much at the right price level to be competitive in the marketplace.

Okay. So when you do run out of that inventory, you will see some proof [indiscernible] But that should be you mentioned an offset to that. I was just wondering what No, that is correct. So we will see that in as we consume the CTO. I don't think there is a disconnect The issue that we wanted to make sure that everybody understood is that those prices are already at a level that it's lower than last year. So making a comparison year on year on this is the CTO reduction, that CTO cost reduction is impacted by the fact that we're also reducing have reduced our prices to be competitive in the marketplace. But we will see an improvement as the high inventory CTO is Okay, understood. And then secondly, could you just talk about about the auto markets a little bit more? What are you seeing trends in Q1? Especially in the terms of mix of of hybrid versus EVs and how that will play out through the year.

Yes. Let me ask Jonathan if you can comment on that. Sure. Thank you, John.

Yes, what we're looking at is in line with what we've seen in the most recent S and P global forecasts less of a declining interest in EVs versus hybrids, which we know bodes well for Ingevity's content of vehicles. Next question comes from Daniel Rizzo from Jefferies.

Your line is open. Please go ahead. Good morning, everyone. Thanks for taking the question.

Can you just put tariffs in perspective in terms of what your customers are saying in the near term impacts and how it might affect the order patterns?

Could you repeat that last part of the question?

What your customers are saying about tariffs about their near term impacts and how it might affect order patterns?

Okay, got it. So yes, that's a great unknown to be honest. Honest. There's definitely a lot of uncertainty and unfortunately not a lot of clarity. So far today, we have seen no impact when it comes to longevity or even when it comes to our customers. So in that regard today, all of the announcements have really had very minimal impact on both our customers and our business. But there's no question that some changes of what has been proposed could have impact either in automotive production in The U. S. Consumer demand in The U. S. Related to higher price or higher inflation related to those tires. But for the time being, we really haven't seen anything. It's just the uncertainty that it's bringing to not only us, but our customers. Okay.

Thanks for that. And then just in terms of CapEx with the changes that are going on and reducing your footprint and stuff like that, I was just wondering Of what you're projecting for 2025, how much of that is maintenance CapEx And is there any I mean, will you be spending it all on Performance Materials? Is that necessary or just how we should think about going forward?

Yes. Most of the expected spend is on maintenance and what we call she safety, health, environmental. But there is some growth spend in there. But I would say for 2025, it is primarily maintenance related spend.

Thank you very much. The next question comes from John McNulty from BMO Capital Markets.

Your line is open. Please go ahead. Good morning. Thanks for taking my question.

So Just regarding some of the increased innovation spend in PM, can you help us think about where that's going. I'm assuming some of it's toward the Nexion platform, but can you help us to think about some of the investments that you're making there?

Hi, John. Good morning. Yes, indeed, you're right. They've increased spend there is as you know, as we look at these new applications in batteries and specifically in the silicon anodes, it requires a significant amount of testing. And not only testing, but also the fine tuning of the the materials. So I would say the vast majority, if not all of it, is related to the to the development of the new application for [indiscernible] Both for electric vehicles and other applications.

Okay, got it. No, I appreciate the color. And then And then the other question was just Mary, I think you said on the cash flow side, you're not assuming any improvements in 2025 on a working capital basis. I guess why would that be if the CTO inventory is still kind of sticky and you're going to work through it in the first and second quarter. Is is there an offset that we should be thinking about or is that just kind of a level of conservatism? I guess, how should we be thinking about that?

So I think what I was trying to to point to is we saw such a big reduction in working capital, benefiting cash in 2024. I'm cautioning people not to expect that again because in a more normal environment, putting the high cost CTO aside in a more normal environment, we would expect to grow the company and have increasing accounts receivable and inventory off of our now new kind of base business. So that's really what I was trying to address.

Okay. But should we be thinking thinking about the CTO inventory working itself through, will that likely be at least somewhat of a a tailwind or again does it get offset by the growth maybe in the the core business? I guess trying to size out how big is that PTO inventory that has to be worked through maybe? [indiscernible] sitting here today is that the inventory related benefit [indiscernible] by other increases in working capital as we respond to growing parts the business.

That's our assumption today.

Got it.

Okay.

Very much for the color. The next question comes from Abigail Yves from Wells Fargo.

Abigail, your line is open. Please go ahead.

So I see you're guiding for 50% EBITDA margins. From Materials in twenty five How should we be thinking about Performance Materials margins longer term in a more volume growth oriented environment given that you're expecting global auto production to be lower So I guess in the short term, we continue to expect Performance Materials business delivered that 50% EBITDA margins Obviously, that depends on us continue to sell at the levels that we're predicting for automotive production. Any significant change in automotive production or a significant shift towards battery elective vehicles would definitely have an impact in either direction. I mean, the more the more ICE or hybrid vehicles, the better for us. Which is the trend that we are seeing today. And in that regard, we do expect to keep those margins. We've talked about the fact that there continue to be further regulatory rules in China. That if implemented in 2028 they will have a significant benefit to the utilization of carbon. And as such, we expect that amount to come up, but that would be the time that could be any competitor coming in. So as we think about the longer term EBITDA margin on this business.

Competitor in China, then our margins will be in the high 40s. But at least for 2025, our expectation is that those margins are going to remain in the 50% range. Based not only on the current sales, but all of the actions that we've taken regarding productivity in our manufacturing Okay. Got it. You. We have a follow-up from John from CJS Securities.

John, please go ahead. Hi, thanks for the follow-up. I might have missed this if you said it earlier, but I was wondering if you could talk about the logistics explaining alternatives for the industrial One, does that include the alternative fatty acids business And two, how would you physically separate [indiscernible] business from the paper and business in the event you find a buyer or something else just explain how something like that will be structured.

Yes, that's a very good question, John. So again, we're still assessing the options. And this obviously could change. But at this time, our expectations is that we will continue to remain flexible when it comes to raw material supply.

So as such, we will keep the flexibility on alternative passy assets or CTO based TOFA for the pavement business. So we don't expect that to change that capability that we have developed over the past couple of years. When it comes to the actual assets, and you're probably very familiar with this in the chemical industries, People and companies have done this many at times where you have assets in the same location, but you are able to separate them and find ways to provide the services. What again, our current thinking is we will keep all of those assets for payment.

Even though they are collocated in the same site, but they are different assets.

And be able to that in sort of a condominium as many condominiums exist today in the chemical industry. I always say it's not something that it's easy, but it has done many, many times and worked well.

So that's what we're thinking. But again, it's still the analysis. It's something that we're developing and we'll come up with more information when we're ready. But hopefully, that color does provide a little perspective.

It does. I was wondering, have you spoken to outside parties who might be interested yet or is this still an internal focus just figuring out what you can As you could imagine, the moment we announced this, we have had a fair amount or a significant amount of interest on the assets. So we are again continuing the assessment and evaluation and we'll come up with more information later. But yes, even at the moment we announced, there were a fair amount of inbound requests as would have expected Understood. You very much.

We have no further questions. So I hand the call back to the Ingevity team for some concluding remarks.

Great. Well, that concludes our call. Thank you for your interest in Ingevity Ingevity 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 lines.