Ingevity Corporation (NYSE:NGVT) Q4 2023 Earnings Call Transcript
Ingevity Corporation (NYSE:NGVT) Q4 2023 Earnings Call Transcript February 22, 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: Hello, and welcome to the Ingevity Fourth Quarter and Full Year 2023 Earnings Call. My name is Alex and I'll be coordinating the call today. [Operator Instructions] I hand over to your host, John Nypaver to begin. Please go ahead.
John Nypaver: Thank you Alex. Good morning and welcome to Ingevity's fourth quarter and full year 2023 earnings call. Early this morning, we posted a presentation on our investor site that you can use to follow today's discussions. 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. 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 Hall, our CFO. Our business leads Ed Woodcock, President of Performance Materials; Rich White, President of Performance Chemicals; and Steve Hulme, President of Advanced Polymer Technologies are 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 and the business segment results for the fourth quarter and full year. John will then provide closing comments and our 2024 guidance. Our prepared comments will focus on full year results, but we are happy to take questions on the quarter during the Q&A portion of the call. With that over to you John.
John Fortson: Thanks, John, and hello, everyone. On slide 4, you can see what our highlights of Ingevity's 2023. In a challenging year, our most profitable businesses performed incredibly well. As you all know the broader industrial markets experienced a major downturn last year and we were not immune. We have also been grappling with unprecedented CTO raw inflation in our Performance Chemicals segment. Despite all that, we accomplished a lot last year. Performance Materials posted their highest sales and EBITDA ever. Global auto production is getting closer to pre-2020 levels with a good part of that growth a result of China and other Asian countries exporting more vehicles. Another growth driver is the increased production of hybrid automobiles and more fuel-efficient internal combustion engines.
Consumers around the world are showing an increased preference for these options. Even though the engines in these vehicles are smaller than traditional ICE engines, we get similar value for our content and hybrids and more fuel-efficient ICE engines as we do in traditional ICE engines because of the value our technology brings to the evaporative emissions solution, advanced polymer technologies, which we reported as its own segment in 2023 was impacted by the industrial slowdown. Their traditional end markets, what we refer to as old economy when speaking about APT are industrial in nature and volume was down across the board, but since focus is on New Economy markets, which are end markets that present exciting growth opportunities where the sustainable nature of caprolactone technology has added value.
This includes markets such as high-tech paint protective film on autos, where Capa provides durability and food packaging where Capa is used to improve flexibility and more importantly improve the biodegradability of the package in multiple environments. That biodegradable quality is also being recognized by more and more apparel companies as a solution for sustainable fabrics to help address landfill issues and micro plastics that come from synthetic fibers. While these markets are small today, they are growing very rapidly and will play a big part of the future of this business. Importantly the team revamped their cost structure in a way that we believe will allow them to sustainably maintain EBITDA margins in the mid 20% over time. Payment Technologies also had a terrific year with record sales, since we've now fully integrated the road markings business we acquired in 2022, we have renamed the pavement business line to Road Technologies.
This name change better describes our expanded product reach. Road Technologies benefited from increased pricing and sales not only in the US, but in other regions around the globe. We are excited about what our integrated offering can provide to customers. With the backdrop of 2023 of a global industrial demand slowdown and unprecedented CTO cost, the Industrial Specialties business had a tough 2023. As a result, we accelerated the repositioning of our Performance Chemicals segment, which included the conversion of our Crossett Arkansas plant to run 100% on non-CTO, only of feedstocks and announced the closure of our DeRidder Louisiana performance chemical site. As an update, the DeRidder refinery ceased operations on February fourth. With this refinery shutdown and the conversion of our Crossett site we have taken approximately 300000 tonnes of CTO refining capacity off-line, which represents roughly 30% of total US refining capacity.
We took these actions to focus our people and capital are higher growth less cyclical end markets. In a few moments I'll share our guidance for 2024, but to set the stage, we expect strong performance in Performance Materials and road technologies within Performance Chemicals. As we mentioned last quarter, we will sell excess CTO at a loss and we will be presenting our results and guidance in a way that reflects our core operations, while giving transparency to the access CTO impact. We took decisive actions in 2023 and believe the company will begin to see the benefits this year. With that I'll turn it over to Mary.
Mary Hall: Thanks, John and good morning, all. Please turn to slide 5. As John mentioned in 2023, we accelerated the implementation of our strategy to diversify our performance chemical feedstocks and reposition the segment for profitable growth. These actions resulted in after-tax charges of $120 million in Q4 and $138 million for full year 2023. These charges drove a GAAP net loss for Q4 of $117 million and a full year net loss of $5 million. We'll discuss our results on a non-GAAP basis for the remainder of our presentation and prepared remarks. Please refer to our earnings release for reconciliations to these of these non-GAAP financial measures to their most comparable GAAP financial measures. Full year sales were up slightly as increased global automotive production and the addition of the road markings business drove growth in Performance Materials and road technologies, respectively.
This was largely offset by sharp volume declines in APT and the Industrial Specialties business line due to the global industrial slowdown which continued throughout the year. Adjusted gross profit of approximately $560 million was lower by 12% primarily due to the higher CTO costs we discussed throughout the year. This combined with lower volumes and the negative impact on plant utilization rates resulted in a 500 basis points drop in adjusted gross margin to 33.1%. Adjusted SG&A improved by 14% due to the cost savings actions taken during the year and lower variable comp. These cost savings actions are expected to result in annual savings beginning in 2024 of $65 million to $75 million. Adjusted EBITDA for the year was down 12% to $396.8 million with an adjusted EBITDA margin of 23.5% down about 360 basis points from full year 2022 as the gross margin compression of 500 basis points was partially offset with the cost savings.
Diluted adjusted EPS for the year of $3.94 is lower than the prior year due primarily to the gross profit decline and higher interest expense due primarily to a full year of acquisition related borrowing costs associated with the Ozark acquisition in Q4 of 2022. We expect our 2024 tax rate to be similar to 2023 between 22% and 24%. Let's turn to slide 6. And in the top-left chart you can see how the price increases in performance chemicals drove revenue up despite declining volume as Performance Chemicals continued to be our largest segment with approximately $900 million in revenue resulting in a negative mix impact on the EBITDA margin. Going forward as we complete the repositioning of Performance Chemicals, the portfolio mix becomes more balanced with Performance Chemicals and Performance Materials revenues similar in size and the portfolio margin profile will be improved.
Our free cash flow was a healthy $95 million, but was down about $76 million from 2022. The drop is primarily due to the gross margin compression as we were unable to pass through approximately $100 million of increased CTO costs. In response, we successfully focused on improving working capital and constraining capital spend. Our leverage did tick up year over year despite some debt reduction, as EBITDA was pressured by the CTO costs and lackluster industrial demand environment. We are in compliance with all of our bank covenants and have significant cushion. Turning to slide 7, you'll find results for Performance Materials. As John mentioned in his opening remarks, 2023 was a record year for this segment for both revenue and EBITDA. Full year revenue was up 7% to $586 million, due primarily to increased pricing of automotive products.
In addition to improved volumes as global auto production increased. We saw our volumes increase in Asia as the region began exporting more autos and volumes up in North America as well where auto production was at its highest levels since pre 2020. Full year EBITDA was up 14% to $286.6 million on the favorable product mix shift to our more profitable automotive end markets, year-over-year price increases and lower SG&A. We saw higher input costs in this segment during 2023, primarily from elevated raw material prices, but we are seeing some improvement in these costs as we enter 2024. EBITDA margin for the year was 48.9% matching the segment's highest full year EBITDA margin ever. We believe the trends we saw in 2023 driving these strong results for Performance Materials will continue to be a tailwind for this segment.
For example, we saw global auto production increase over 8% from 2022 to 2023. But that just gets us back to what we consider more normal levels. Auto production is typically a slow and steady growth engine. And as more hybrids are adopted versus all battery electric vehicles Ingevity's addressable market and autos should continue to grow. In addition to these macro trends, we believe the value of our technology brings to emissions control will enable us to maintain this pricing leverage that we showed in 2023. And finally, as auto production continues to grow, our product mix moves increasingly from the lower margin filtration markets to higher margin auto, which helps support the expectation that mid to upper 40s EBITDA margins will continue.
We believe all of these factors are in play for many years to come. Turning to Slide 8. Revenue for the year and Advanced Polymer Technologies was down 17% due to lower volumes attributed to global market weakness in many of the segment's end markets. This was most acutely felt in Asia, where we saw competitors offering substitute products at bargain prices. In response to the soft market, our team was able to hold price for most of the year. And that coupled with lower input costs, resulted in full year EBITDA of $44.5 million up to 11% and an EBITDA margin of 21.8% up 550 basis points from last year. Volume in this segment was hit hard by customers' ongoing de-stocking in 2023 and we're cautiously optimistic that de-stocking is complete based on order patterns.
We are seeing early in 2024. While we aren't ready yet to call a trend, we do believe the second half of the year will be stronger than the first half. In addition, as we've discussed before, Steve's team is focused on advancing the adoption of caprolactone technology in higher growth areas, as John mentioned. You hear us mention bioplastics a lot, because we're very excited about our growth prospects in this area. We're seeing the use of bioplastics grow in key end markets where we already participate, such as consumer packaging, ag chem and apparel growth rates are strong albeit off of a low base, but the base continues to broaden the growth in these end markets combined with the improved margin profile already in place should deliver good year-over-year growth in 2024.
Now please turn to Slide 9 for Performance Chemicals results. Full year revenue was up 3% to nine $902.1 million as technology adoption drove higher sales in our legacy pavement business, plus we had the addition of the road markings business. The increase in road technologies offset a 16% decline in industrial specialties, which was challenged by an extended flow slowdown in cyclical industrial markets like adhesives and inks. This segment's performance was very end-market specific for example, we were able to increase price during the year on many of our TOFA based products, which go into our higher margin, higher growth end markets like growth technologies. But our rosin based end markets such as adhesives and inks, are more price sensitive and we chose to make some price concessions towards the end of the year to reduce inventories.
We expect this pressure to continue in the first half of 2024, as we will talk more about in our guidance Going forward due to the repositioning of the segment, we will have significantly less exposure to rosin based end markets and we are expanding our product offerings in legacy TOFA end markets to include products made from other oleo. This will allow us to optimize raw materials streams, while also developing new end markets for us with oleo based products. Segment EBITDA for the year was down 59% to $65.7 million compared to $160.4 million last year. This roughly 100 million delta, is primarily the result of increased CTO costs. The graph in the bottom right corner shows how our CTO. spend doubled in 2023 despite significantly less volume purchase.
Our commercial team was able to recover a significant portion of the cost increase through price, but the remainder hit the bottom line. As John noted, with the closure of DeRidder and the changes across that we've taken approximately 30% of total US CTO refining capacity offline. So now our contracted CTO exceeds our needs, and we are selling the excess CTO into the market. In Q4 of 2023, we executed our first three sales for a net loss of 22 million. These access CTO. resales are noncore to our business, and are excluded from sales and adjusted EBITDA. We are reporting the net effect of the sales in this case, a loss on our GAAP income statement, in the line item other income expense net, and we will provide this transparency every quarter as we execute resales.
We continue to expect to incur cash losses of approximately $30 million to $80 million in 2024 related to access CTO resales and it is reflected in our free cash flow guidance. And now, I'll turn the call back to John for an update on guidance and closing comments.
John Fortson: Thanks, Mary. Our guidance for 2024 for sales of between $1.4 billion and $1.55 billion and adjusted EBITDA between $365 million and $390 million. The midpoint of $1.475 billion and $377 million for revenue and EBITDA, reflect a balanced approach to next year, Ingevity as a result of a lot of effort across the company is positioned for success. Both the Performance Materials segment and the Road Technologies business should continue to experience strong momentum and growth. The PM business is benefiting from both consumer preference for hybrids overall electric vehicles in the current market, and challenges to EV infrastructure both in terms of production, but also in recharging. As it maximizes the opportunity in its legacy markets, the segment continues to advance its carbon juice in both battery technology and other applications, as it manages the auto industry transition.
Road Technologies continues to benefit from increased spending on roads in the US and around the world and is gaining share versus other more traditional technologies. The cost structure at APT has improved to a point, where they can maintain industry-leading margins. Despite weak volumes in the back half of 2023, we expect APT volumes to increase sequentially each quarter in 2024. This will be a transitional year for Industrial Specialties. While most of the charges associated with the closure of DeRidder are in restructuring charges, there remains $10 million to $15 million of online costs that we expect to incur in 2024 that are included in our guidance. In addition, we have made great progress in the conversion of our Crossett site to run non CTO oil-based raw materials but as we ramp up those efforts, which has included building out a commercial team and working with customers to test products, we expect to have $15 million to $25 million of costs associated with that ramp up this year.
We mentioned taking a significant portion of CTO refining capacity offline, which we believe will result in lower prices over time and that the price we pay for CTO will fall in the back half of this year due to the lag in our contract pricing. We have conservative assumptions for CTO pricing in our forecasts and to the extent we do better, we should benefit. All of these are good setups for the year. However, there are a number of broader economic points of interest that we are monitoring. The global economic outlook remains weaker than we would like and this will be an election year. These two items impact our industrial end markets and affect our Industrial Specialties business and APT. As we have described, the CTO market remains dynamic.
If necessary, we will take additional repositioning steps to drive increased profitability. We will be very disciplined in cash management as we move through the year and are minimizing capital expenditures and other allocation strategies. While we pay down debt to our more normalized historical levels. As you all know, we do not provide quarterly guidance, but given the environment we like most of our chemical company peers expect a weaker first quarter with strength improving sequentially each quarter over the course of 2024. First quarter like our fourth, suffers from the seasonality of the paving business, which operates primarily in the second and third quarters. Also the Chinese New Year falls in the first quarter and this always impacts auto production and industrial markets in that country.
We expect after Q1 to see sequential improvements across our business lines. As I mentioned at the start of this page, we are excited for 2024. Our largest and most profitable businesses are set up for a good year. The transition in Performance Chemicals is happening and we are looking for is 2024 gets underway. With that I'll turn it over for questions.
Operator: [Operator Instructions] Our first question for today comes from Vincent Anderson of Stifel. Your line is now open. Please go ahead.
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