雅虎香港財經 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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