Ingevity Corporation (NYSE:NGVT) Q4 2022 Earnings Call Transcript

Ingevity Corporation (NYSE:NGVT) Q4 2022 Earnings Call Transcript February 28, 2023

Operator: Ladies and gentlemen, hello, and welcome to the Ingevity Fourth Quarter and Full Year 2022 Earnings Call and webcast. My name is Maxine and I'll be coordinating for today. . I will now hand you to your host, John Nypaver, as and Investor Relations, to begin. John, please go ahead when you're ready.

John Nypaver: Thank you, Maxine. Good morning, and welcome to Ingevity's fourth quarter and full year 2022 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 on 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 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 these projections as further described in our earnings release. Our agenda is on Slide 3. Our speakers today are John Fortson, our President and CEO; Mary Hall, our CFO; Ed Woodcock, President of Performance Materials; and Rich White, President of Industrial Specialties and Pavement Technologies. In addition, Steve Hume, President, Engineered Polymers will be available for questions and comments. John will start us off with some highlights for the year. Mary will follow with a review of our consolidated financial performance for the fourth quarter and full year. Rich, on behalf of his Performance Chemicals segment, Steve Hume, will discuss the entire Performance Chemicals segment, and Ed will review the results of Performance Materials.

Finally, John will conclude with our guidance for 2023. With that, over to you, John.

John Fortson: Thanks, John, and good morning, everyone. Thanks for joining us today. On Slide 4, you will see that Ingevity has much to be proud of in 2022. Both segments posted record revenue and EBITDA, combined, Ingevity's revenue reached almost $1.7 billion, and our EBITDA was over $450 million. We profitably grew all the businesses in our portfolio. This was despite the challenges of 2022 that were thrown at us as we grapple with energy spikes, inflation and then fears of a recession. Like many of our peers, the fourth quarter was slower than expected. For us, the quarter was the tail of two halves. October and early November were strong, but starting just before Thanksgiving, we saw a significant deterioration in our order book as customers aggressively destocked inventory in advance of year-end, particularly in higher-value product lines such as adhesives.

Additionally, as China began to reopen, auto OEMs and parts plants in the country ceased production as they dealt with rising COVID infections. During 2022, Ingevity continued to lay the foundations for sustainable long-term growth. Our investments included our purchase of Ozark materials, which expands our reach into payment marketing in the road construction market. We developed several alternative fatty acids, allowing us to diversify our raw material streams and expand into new markets. We certified our TOFA for use of the biofuels market. We added Capa polyols capacity for our Engineered Polymers business at our rig Louisiana site, allowing us to better meet the growing demand for this product. And we continue to develop new market opportunities for our activated carbon through our investments in the electric battery space and renewable natural gas.

We did all these things while also returning significant capital to shareholders through our share repurchase program. All these growth initiatives are consistent with our mission to purify, protect and enhance the world around us. And we received recognition for these efforts in 2022 with a gold ranking from EcoVadis, an inclusion new exclude Americas most responsible companies. We invite you to learn more about our ESG efforts by reading our sustainability report found on our website. I'll end my opening comments with a heartfelt thank you to the entire Ingevity team for their perseverance in delivering record performance in 2022. We are now firmly focused on 2023 and are off to the races. With that, I'll turn it over to Mary to discuss the financials.

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Mary Hall: Thanks, John, and good morning all. Please turn to Slide 5. As John mentioned, for full year 2022, we posted record sales and EBITDA with sales up nearly 20% to $1.7 billion and EBITDA up over 7% to $453 million. Adjusted gross profit of $636 million was higher by almost 10%, but margins were down for the year as input costs accelerated faster than our price increases with a particularly noticeable impact late in the year as sales volumes in certain higher-value product lines fell off significantly in the last six weeks. We kept SG&A costs as a percentage of sales flat, showing that our growth initiatives are being resourced in a disciplined manner. Given the inflation we saw in raw materials, logistics, energy and wages during the year, we're pleased that we maintained a strong full year EBITDA margin of 27.1% despite fourth quarter EBITDA of $74 million being heavily impacted by the sudden deceleration of sales due to customer inventory destocking and the COVID-related slowdown in China.

Despite the challenging end to the year, our full year diluted adjusted EPS of $6.01 is a record for the company. Turning to Slide 6. In the upper left-hand chart, you can see the record sales results as well as the mix of sales per segment. This reflects the strength of Performance Chemicals in 2022. And given the addition of Ozark we expect the revenue mix between segments to be similar going forward. We expect to continue to grow revenue and EBITDA in both segments through organic and inorganic growth while maintaining specialty margins. Based on the segment mix, we expect consolidated EBITDA margins in the mid-20s with upside potential as global automotive production recovers faster than we anticipate. The upper right chart shows we invested over $142 million in organic capital spend in 2022 with over 40% on growth projects, and we still generated over $170 million of free cash flow.

A portion of that free cash flow was used to repurchase $145 million of shares, as you can see in the bottom left chart. For the year, we repurchased 2.1 million shares and we've repurchased over 6 million shares since becoming a public company. The chart on the lower right shows our net debt leverage. As noted in our last earnings call, we used our revolving credit facility to acquire Ozark, elevating our net leverage to about 2.9 time. We expect to have net leverage back to our target of around 2.5 time by the end of 2023. In summary, the company delivered record performance and strong free cash flow while managing through historic challenges. I'm confident we will continue to deliver growth in revenue and earnings in 2023, while maintaining our strong balance sheet and cost discipline.

And now I'll turn it over to Rich to discuss Performance Chemicals.

Rich White: Thank you, Mary. Hello, everyone. Turning to Slide 7. It was a record year on both revenue and EBITDA and Performance Chemicals with revenue up 28% and crossing the $1 billion threshold for the first time. Full year EBITDA of over $200 million increased 16% over prior year, while our margin declined primarily due to the impact of higher input costs. In addition, Q4 was negatively impacted by significant customer destocking of higher value products in the second half of the quarter, particularly in adhesives, as well as lower sales in our payment business as many municipalities had depleted their budgeted dollars for the paving projects prior to year-end. Engineered Polymers ended the year strong with revenue in the fourth quarter of $59.6 million a 41% increase from the prior year's quarter, which helped drive full year revenue increase of 32% to $244.7 million.

Throughout the year, the team saw plenty of inflation in raw materials freight and energy prices. They are able to help offset these increased costs with higher selling prices for our specialty products and increased volume due to strong customer demand, particularly in automotive, footwear and apparel. Sales in each of these end markets grew over 40% from the prior year. The Capa polyol expansion at our DeRidder site is up and running, increasing our capacity to support continued growth in 2023 and beyond. Turning to payment technologies. Revenue for the full year was up 24% to $241.3 million, which includes fourth quarter revenue from our newly acquired road marketing business, Ozark Materials. We continue to see adoption of our payment technology as municipalities are valuing the benefits of our products that our products provide, such as lower energy required to pay, elimination of harmful emissions and longer-lasting road.

Combine this with the higher reflectivity and long and lasting attributes of our road margins, and we believe we are headed towards a strong 2023. Industrial Specialties had a strong year, increasing revenue by 28% from the prior year. Demand continues to grow in the high-value areas such as oilfield, which is benefiting from increased natural gas production and agrochemicals where our products bring values such as enabling fertilizer to last longer, thus requiring fewer crop treatments. Fourth quarter revenue was up 12% from a year ago. Results were negatively impacted by significant customer destocking, primarily in our high-value adhesives business and, to a lesser extent, some supply disruption. In addition to the raw material cost inflation we experienced in 2022, the supply-demand dynamics of a key raw material, crew tall oil are changing.

You have heard us mention biofuels, which can be either additive as a substitute for traditional diesel fuel. There is a directive in Europe to move more towards with diesel to biofuel. , or CTO, which is a key raw material within my segment is becoming a highly sought-after raw material for the biofuel market. We view the new biofuel market as an exciting opportunity for us and our expertise in finding CTO. That being said, the market is still developing, and we believe that speculation among new interest and investment is driving increased volatility around the price and availability of CTO. We have long-term contracts to cover the majority of our supply needs yet, we expect the price of set to increase compared to the past. As you know, we converted a portion of our cross at Arkansas facility to run non-CTO based alternative fatty assets which gives us new raw material streams that offers our customers alternative to CTO-based chemistries as well as open new markets for us.

With that, I'll now turn the call over to Ed to discuss performance maturity.

Ed Woodcock : Thanks, Rich. As you can see on Slide 8, revenue for the Performance Materials segment was flat in the fourth quarter at $132.8 million as the impacts from COVID-19 outbreaks affected not only our operations in China, but also disrupted global auto production. Full year revenue in 2022 was $548.5 million, an increase of 6% versus 2021. The increase was driven by higher volume which was an encouraging sign as supply chains and ship availability improved. As supply chains normalize and China recovers, we believe this will facilitate increased global automotive production in 2023. EBITDA margins for the year were lower by 230 basis points. The drop is attributed to higher energy and raw material costs. As we noted on our last call, we typically negotiate price with our customers annually early in the year and these increased costs have been taken into consideration for 2023 pricing.

We were pleased to see the European Commission publish their proposed Euro 7 regulatory package for automotive emissions control, which is now being evaluated by the European Parliament and Council in their ordinary legislative procedure. As proposed, it would result in tighter regulations on automotive emissions, similar to those enacted in Brazil last year. What that means to Ingevity in simple terms is our activated carbon content per vehicle would nearly double. We were hoping the proposed emission standards would be aligned to the U.S. standards, which are the most stringent in the world, but are pleased with the progress. The Euro 7 proposal includes a July 25 effective date, which is earlier than we expected and means we could potentially see the impact as soon as 2024.

Also, as many other countries typically follow European standards, we should benefit as those countries tightened their standards as well. I will now turn the call back to John to discuss the outlook for 2023 and for closing comments.

John Fortson: Thanks, Ed. Please turn to Slide 9. As we mentioned on our last call, in an effort to increase transparency to investors, we have concluded we should report our Engineered Polymers business as a separate segment. They are a big part of our future, and we think it is important for investors to be able to see their growth and progress as they make moving into attractive end markets. This reporting change will begin in the first quarter of 2023, and this segment will be renamed as a part of this process. I'm also very excited to confirm the date of our Investor Day. It will be May 22 in New York City. Save-the-date notifications will go out. And if you want to be added to our invitation list, please contact our IR team.

We hope to see many of you at the event where we'll discuss the long-term growth drivers in each of the business segments and communicate new long-term financial targets for Ingevity. Finally, turning to Slide 10, you'll see our guidance for 2023. And -- we are guiding revenue to be between $1.9 billion and $2.1 billion and EBITDA of $495 million to $515 million. As we look across our businesses, we expect the Performance Materials segment to grow its revenue and maintain its mid-40s margins as price increases take effect and global auto production continues to normalize from its depressed levels. Our Engineered Polymers business, while it has grown its top line, experienced compressed margins throughout most of 2022, primarily due to energy costs in Europe.

We expect their profitability to improve due to increased pricing volume growth and cost discipline. Our Payment Technologies and Ozark businesses will benefit from infrastructure spending tailwinds. Parts of our industrial specialties end markets should continue to grow at attractive rates. In particular, our oilfield and adhesive businesses. However, we expect this business will be challenged by significant increases in the cost of its traditional raw material CTO. CTO pricing has risen over the last year and is expected to continue to escalate over the course of 2023. We will address this by continuing to raise prices on our legacy products, and also by offering our customers fatty acid alternatives from other plant-based oils such as soy.

CTO inflation is being driven by its value in the biodiesel markets. While this developing market is creating volatility and price pressure on CTO, it also represents a large opportunity for us, and we intend to be a participant in this market this year. 2023 has started somewhat slowly, but we expect customer order patterns to normalize and vehicle production to improve. As the year progresses, we expect to see the momentum pick up and the benefit in all segments with growth in revenue and earnings. We hope you share our enthusiasm for Ingevity. And with that, I'll turn it over to questions.

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