Ingevity reports first quarter 2023 financial results

HIGHLIGHTS: (comparisons versus prior year period)

• Net sales of $392.6 million, up 2.6%
• Net income of $50.7 million and diluted earnings per share (EPS) of $1.35; adjusted earnings of $41.1 million and diluted adjusted EPS of $1.09
• Adjusted EBITDA of $103.9 million and adjusted EBITDA margin of 26.5%
• Operating cash flow of $5.2 million with free cash flow of negative $20.2 million, reflecting seasonal inventory build
• Share repurchases of $33.4 million
• Converting Crossett, AR plant to run 100% on non-CTO feedstocks to produce oleo-based alternate fatty acids (AFA)
• Adjusted 2023 guidance for sales between $1.75 billion to $1.95 billion and adjusted EBITDA between $450 million to $480 million

The results and guidance in this release include non-GAAP financial measures. Refer to the section entitled “Use of non-GAAP financial measures” within this release.

Ingevity Corporation (NYSE: NGVT) today reported its financial results for the first quarter 2023.

First quarter net sales of $392.6 million rose 2.6% versus the prior year quarter, reflecting increased pricing across all segments and revenue from the Ozark road markings business acquisition (Ozark) completed in the fourth quarter of 2022, partially offset by weaker volumes across most business lines. Net income decreased 17% to $50.7 million and diluted earnings per share (EPS) decreased 13% to $1.35 with diluted adjusted EPS of $1.09. Net income and EPS were negatively impacted by lower operating earnings, and increased interest expense and depreciation and amortization associated with Ozark.

Adjusted EBITDA decreased 13% to $103.9 million with adjusted EBITDA margin of 26.5%. The decrease is primarily due to gross margin pressure from lower volumes, increased raw material costs, and higher SG&A.

“The first quarter started slow, especially in January and February, due to the delayed recovery in China which negatively impacted both Performance Materials and Advanced Polymer Technologies segments. We also saw continued destocking in certain product lines, particularly adhesives in Performance Chemicals’ Industrial Specialties business, and pressure on margins from rising crude tall oil (CTO) costs,” said John Fortson, president and CEO. “I’m extremely proud of the team for continuing to execute well on what they can control and deliver solid results in this challenging environment.”

Performance Chemicals

Sales in the Performance Chemicals segment were $185.6 million, up 8% from prior year.

Industrial Specialties posted sales of $139.8 million, down 3%, due to lower volume attributed to continued customer destocking, particularly in adhesives products. Pavement Technologies sales increased to $45.8 million, driven by sales associated with Ozark and growth from technology adoption in our legacy pavement applications.

Segment EBITDA was $20.3 million, down 34% versus the prior year quarter primarily reflecting lower sales volumes and its impact on plant utilization, and higher raw material costs, resulting in segment EBITDA margin of 10.9%.

“Pavement Technologies saw volume improvement from its legacy business primarily due to regional expansion outside of the United States, and we saw the benefit of our increased presence in road markings from Ozark. Industrial Specialties continued to be impacted by customer destocking, primarily in adhesives, which outweighed the growth in Pavement,” said Fortson. “We continued to feel margin pressure, particularly from elevated CTO pricing, our key raw material for the segment, and expect further increases before prices stabilize toward the end of the year. As part of our strategy to diversify our raw material stream and maximize plant utilization to reduce cost volatility, we have consolidated CTO processing in our DeRidder and North Charleston sites and are fully transitioning Crossett to AFA production.”

Advanced Polymer Technologies

Sales in the Advanced Polymer Technologies (APT) segment were $65.6 million in the first quarter, up 6% from prior year due to higher pricing across the segment and increased demand in the automotive and bioplastics markets, particularly in North America, partially offset by lower demand in Europe and customer destocking in Asia. Segment EBITDA was $13.8 million, up 34% and segment EBITDA margin for the quarter was 21.0%.

“This is the first time we are reporting APT, formerly known as Engineered Polymers, as its own segment. APT delivered another quarter of strong results driven by increased year over year pricing and strong customer demand in key end markets,” said Fortson. “The business delivered margin improvement of over four hundred basis points, which is a reflection of pricing gains required to offset higher input costs.”

Performance Materials

Sales in Performance Materials were $141.4 million in the quarter, down 5% primarily due to the slower than expected automotive recovery in China as well as foreign currency headwinds, which offset price increases and a strong sales quarter in North America. Segment EBITDA was $69.8 million, down 10% versus the strong prior year quarter due to lower sales volume resulting in unplanned downtime at our manufacturing facilities supporting the China market in response to the slower automotive recovery, with segment EBITDA margins of 49.4%.

“Performance Materials had strong sales in North America during the quarter, but the slower China recovery impacted their results,” said Fortson. “Margins continue to remain impressive, and the team is ready to serve the China market once it picks up, while taking advantage of the expected increase in vehicle production in both the U.S. and Europe.”

Liquidity/Other

First quarter operating cash flow was $5.2 million with free cash flow of negative $20.2 million reflecting lower earnings and seasonal inventory build. Share repurchases for the quarter were $33.4 million and $411.5 million remains available under the July 2022 $500 million Board authorization. Net leverage was 3.1 times, reflecting increased borrowing for the Ozark acquisition.

Full Year 2023 Guidance

“We are expecting a strong year in APT and Performance Materials as the China market recovers and automotive production picks up, as well as strength in our Pavement Technologies business. We expect results in Industrial Specialties to be challenged by elevated CTO costs and the pace of the AFA transition and product adoption. Given this, as well as recent market softness and the possibility of a recession, we are adjusting full year 2023 guidance to sales between $1.75 billion and $1.95 billion, and adjusted EBITDA between $450 million and $480 million,” said Fortson.

Ingevity: Purify, Protect and Enhance

Ingevity provides products and technologies that purify, protect and enhance the world around us. Through a team of talented and experienced people, we develop, manufacture and bring to market solutions that help customers solve complex problems and make the world more sustainable. We operate in three reporting segments: Performance Chemicals, which includes specialty chemicals and pavement technologies; Advanced Polymer Technologies, which includes biodegradable plastics and polyurethane materials; and Performance Materials, which includes activated carbon. Our products are used in a variety of demanding applications, including adhesives, agrochemicals, asphalt paving, bioplastics, coatings, elastomers, lubricants, pavement markings, publication inks, oil exploration and production and automotive components that reduce gasoline vapor emissions. Headquartered in North Charleston, South Carolina, Ingevity operates from 31 countries around the world and employs approximately 2,050 people. The company’s common stock is traded on the New York Stock Exchange (NYSE:NGVT). For more information, visit Ingevity.com. Follow Ingevity on LinkedIn.

Additional Information

The company will host a live webcast on Thursday, May 4, 2023, at 10:00 a.m. (Eastern) to discuss first quarter 2023 fiscal results. The webcast can be accessed here or on the investors section of Ingevity’s website. You may also listen to the conference call by dialing 833 470 1428 (inside the U.S.) or 929 526 1599 (outside the U.S.) and entering access code 122397. Information on how to access the webcast and conference call, along with a slide deck containing other relevant financial and statistical information, will be posted to Ingevity’s investor site prior to the call. beginning at approximately 2:00 p.m. (Eastern) on May 4, 2023, through May 3, 2024, at this replay link.

Use of non-GAAP financial measures: This press release includes certain non‐GAAP financial measures intended to supplement, not substitute for, comparable GAAP measures. Reconciliations of non‐GAAP financial measures to GAAP financial measures are provided within the Appendix to this presentation. Investors are urged to consider carefully the comparable GAAP measures and the reconciliations to those measures provided. The company does not attempt to provide reconciliations of forward-looking non-GAAP guidance to the comparable GAAP measure because the impact and timing of the factors underlying the guidance assumptions are inherently uncertain and difficult to predict and are unavailable without unreasonable efforts. In addition, Ingevity believes such reconciliations would imply a degree of certainty that could be confusing to investors.

Forward-looking statements:

This press release contains “forward-looking statements” within the meaning of the Securities Exchange Act of 1934, as amended, and the Private Securities Litigation Reform Act of 1995. Such statements generally include the words “will,” “plans,” “intends,” “targets,” “expects,” “outlook,” "guidance," “believes,” “anticipates” or similar expressions. Forward-looking statements may include, without limitation, the potential benefits of any acquisition or investment transaction, expected financial positions, expected financial positions, guidance, results of operations and cash flows; financing plans; business strategies and expectations; operating plans; impact of COVID-19; capital and other expenditures; competitive positions; growth opportunities for existing products; benefits from new technology and cost-reduction initiatives, plans and objectives; litigation related strategies and outcomes; markets for securities and expected future repurchases of shares, including statements about the manner, amount and timing of repurchases. Actual results could differ materially from the views expressed. Factors that could cause actual results to materially differ from those contained in the forward-looking statements, or that could cause other forward-looking statements to prove incorrect, include, without limitation, adverse effects from general global economic, geopolitical and financial conditions beyond our control, including inflation and war in Ukraine; risks related to our international sales and operations; adverse conditions in the automotive market; competition from substitute products, new technologies and new or emerging competitors; worldwide air quality standards; a decrease in government infrastructure spending; adverse conditions in cyclical end markets; the limited supply of or lack of access to sufficient crude tall oil and other raw materials; issues with or integration of future acquisitions and other investments; the provision of services by third parties at several facilities; adverse effects from the COVID-19 pandemic; supply chain disruptions; natural disasters and extreme weather events; or other unanticipated problems such as labor difficulties (including work stoppages), equipment failure or unscheduled maintenance and repair; attracting and retaining key personnel; dependence on certain large customers; legal actions associated with our intellectual property rights; protection of our intellectual property and other proprietary information; information technology security breaches and other disruptions; complications with designing or implementing our new enterprise resource planning system; government policies and regulations, including, but not limited to, those affecting the environment, climate change, tax policies, tariffs and the chemicals industry; and losses due to lawsuits arising out of environmental damage or personal injuries associated with chemical or other manufacturing processes, and the other factors detailed from time to time in the reports we file with the SEC, including those described in Part I, Item 1A. Risk Factors in our Annual Report on Form 10-K as well as in our other filings with the SEC. These forward-looking statements speak only to management’s beliefs as of the date of this press release. Ingevity assumes no obligation to provide any revisions to, or update, any projections and forward-looking statements contained in this press release.

Ingevity Corporation

Non-GAAP Financial Measures

Ingevity has presented certain financial measures, defined below, which have not been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and has provided a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP on the following pages. These financial measures are not meant to be considered in isolation or as a substitute for the most directly comparable financial measure calculated in accordance with GAAP. Investors should consider the limitations associated with these non-GAAP measures, including the potential lack of comparability of these measures from one company to another.

We believe these non-GAAP financial measures provide management as well as investors, potential investors, securities analysts and others with useful information to evaluate the performance of the business, because such measures, when viewed together with our financial results computed in accordance with GAAP, provide a more complete understanding of the factors and trends affecting our historical financial performance and projected future results.

Ingevity uses the following non-GAAP measures:

Adjusted earnings (loss) is defined as net income (loss) plus restructuring and other (income) charges, net, acquisition and other-related costs, debt refinancing fees, litigation verdict charges, (losses) and gains from the sale of strategic investments, pension and postretirement settlement and curtailment (income) charges and the income tax expense (benefit) on those items, less the provision (benefit) from certain discrete tax items.

Diluted adjusted earnings (loss) per share is defined as diluted earnings (loss) per common share plus restructuring and other (income) charges, net per share, acquisition and other-related costs per share, debt refinancing fees per share, litigation verdict charge per share, (losses) and gains from the sale of strategic investments per share, pension and postretirement settlement and curtailment (income) charges per share and the income tax expense (benefit) per share on those items, less the per share tax provision (benefit) from certain discrete tax items per share.

Adjusted EBITDA is defined as net income (loss) plus interest expense, net, provision (benefit) for income taxes, depreciation, amortization, restructuring and other (income) charges, net, acquisition and other-related costs, litigation verdict charge, (losses) and gains from the sale of strategic investments, pension and postretirement settlement and curtailment (income) charges, net.

Adjusted EBITDA Margin is defined as Adjusted EBITDA divided by Net sales.

Free Cash Flow is defined as the sum of cash provided by (used in) the following items: operating activities less capital expenditures.

Net Debt is defined as the sum of notes payable, short-term debt, current maturities of long-term debt and long-term debt less the sum of cash and cash equivalents, restricted cash associated with our New Market Tax Credit financing arrangement, and restricted investment excluding the allowance for credit losses on held-to-maturity debt securities.

Net Debt Ratio is defined as Net Debt divided by last twelve months Adjusted EBITDA, inclusive of acquisition-related pro forma adjustments.

Ingevity also uses the above financial measures as the primary measures of profitability used by managers of the business. In addition, Ingevity believes Adjusted EBITDA and Adjusted EBITDA Margin are useful measures because they exclude the effects of financing and investment activities as well as non-operating activities.

GAAP Reconciliation of 2023 Adjusted EBITDA Guidance

A reconciliation of net income to adjusted EBITDA as projected for 2023 is not provided. Ingevity does not forecast net income as it cannot, without unreasonable effort, estimate or predict with certainty various components of net income. These components, net of tax, include further restructuring and other income (charges), net; additional acquisition and other-related costs; litigation verdict charges; (losses) and gains from the sale of strategic investments; additional pension and postretirement settlement and curtailment (income) charges; and revisions due to legislative tax rate changes. Additionally, discrete tax items could drive variability in our projected effective tax rate. All of these components could significantly impact such financial measures. Further, in the future, other items with similar characteristics to those currently included in adjusted EBITDA, that have a similar impact on comparability of periods, and which are not known at this time, may exist and impact adjusted EBITDA.

Reconciliation of Net Income (Loss) (GAAP) and Diluted Earnings (Loss) Per Share (GAAP) to Adjusted Earnings (Loss) (Non-GAAP) and Diluted Adjusted Earnings (Loss) Per Share (Non-GAAP)

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