Daniel Gallagher - VP, IR John Fortson - CFO, EVP and Treasurer Michael Wilson - CEO, President and Director Mike Smith - President, Performance Chemicals Stuart Woodcock - EVP and President of Performance Materials.

Ian Zaffino - Oppenheimer & Co. James Sheehan - SunTrust Robinson Humphrey Jonathan Tanwanteng - CJS Securities Daniel Rizzo - Jefferies LLC.

Ladies and gentlemen, thank you for standing by. Welcome to the Ingevity third quarter earnings conference call. [Operator Instructions]. As a reminder, today's conference call is being recorded. I would now like to turn the conference over to the Vice President of Investor Relations, Dan Gallagher. Please go ahead..

Thank you, Leah. Good morning, everyone. Welcome to Ingevity's Third Quarter 2017 Earnings Conference Call. Earlier this morning, we posted a presentation onto the Investors section of our website. If you haven't already done so, I would encourage you to download this file, so you can follow along on the call.

You can find it by visiting ir.ingevity.com under Events and Presentations. On Slide #2 of that deck you'll see our disclaimer that today's earnings call may contain forward-looking statements.

Relevant factors that could cause actual results to differ materially from these forward-looking statements are contained in our earnings release and in our SEC filings, including our Form 10-K and our most recent Form 10-Q.

Ingevity undertakes no obligation to publicly release any revision to the projections and forward-looking statements made during this call or to update them to reflect events or circumstances occurring after the date of this call. As a reminder, the company has made certain revisions to previously issued financial statements.

These revisions can be found in our news release issued yesterday afternoon. 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 financial measures are included in our earnings release and can be found on the Investor Relations section of our website. Our agenda is on Slide #3. With me today are Michael Wilson, President and CEO; and John Fortson, Executive Vice President and CFO.

First, Michael will comment on the highlights of the quarter and then he will review the performance of the 2 segments. John will discuss our current financial status including year-to-date results and our revised guidance. Then, Michael will make some brief closing remarks before we open the line for questions.

Mike Smith, President of Performance Chemicals; and Ed Woodcock, President of Performance Materials will join the call for Q&A. And with that I'll turn the call over to Michael..

Thanks, Dan. Good morning, everyone. Thank you for joining us this morning and for your continued interest in Ingevity. If you'll turn with me to Slide #4, you will note some highlights for the quarter.

We posted outstanding results in the third quarter, our strategic focus on high-value added product lines and our disciplined execution drove the improved performance in both revenues and earnings.

Revenues grew approximately $12 million or about 5%, as higher volumes, price and mix impacts and favorable foreign currency exchange, all contributed to the increase. Adjusted EBITDA of $73 million was up $13 million versus the prior year's quarter. This represents a 22% increase.

In addition to higher volume gains and price improvement, earnings were further augmented by higher plant productivity, lower raw material costs and savings stemming from our strategic initiatives we took last year to lower our cost structure.

As a result, we saw a sharp 390 basis point increase in adjusted EBITDA margins to 27.5%, making this our most profitable quarter since our spin-off in May of last year. Turning to Slide 5. You'll see that the turnaround in our Performance Chemicals segment accelerated in the third quarter.

Segment sales in the quarter were approximately $179 million, representing an increase of a little more than 3% versus the prior year quarter. The continued rebound in U.S. drilling pushed ourselves to the oilfield customers higher by 31%. According to Baker Hughes, the U.S.

rig count at the end of September was even with the count at the end of June, holding at 940. This is still up significantly from the 522 at this point last year. As we stated last quarter, our teams in the field are seeing continuing improvements in rig efficiency, so our flat rig count doesn't necessarily indicate a softening in the market.

In fact, we continue to see improved volumes. What's more, while we continue to sell tall oil fatty acids or TOFA to this market, we've also seen greater demand for higher value- added derivatized products that deliver improved performance to our customers, while improving our product mix.

Sales to pavement applications customers reached an all-time record, up almost 19% versus the prior year's quarter. Robust demand in this business was augmented by weather patterns in North America that pushed revenue into the quarter. As we indicated last quarter, we experienced a later start to the paving season this year.

In addition, pavement technology sales and margin growth in the Latin America, particularly Brazil, were strong in the quarter.

We were also successful with new products, including new extensions of Evotherm warm mix chemistries, a product that increases adhesion in cold temperature recycling, new high performance micro-surfacing chemistries and versatile chemistries that work in both cationic and anionic paving systems.

These innovations are representative of what we do every day in this business and our year-to-date results evidenced the benefit of our focus on innovation. These results were partially offset by 9% lower revenues into Industrial Specialties applications and these include printing inks, adhesives, agricultural chemicals, lubricants and others.

Volumes in this business were negatively impacted as TOFA availability was constrained to meet the growing needs in higher value-added oilfield and pavement technologies applications. Revenues were also impacted by the elimination of unprofitable sales from our refinery in Brazil, which was shut down at the end of 2016.

We continue to see solid growth and demand for TOFA across our chemicals portfolio. As discussed last quarter, TOFA and rosin come off the refinery in fixed proportions. Currently, we run at production levels, which are determined by rosin demand.

As rosin demand has been relatively flat, there's been a tightening in the TOFA market, which is favorable for customer and product mix upgrade. While pricing for rosin has been generally stable over the last few quarters, it continues to face pressure from in-kind as well as gum and hydrocarbon-based rosin competition.

While the increase in revenues for the segment was modest, we grew segment EBITDA by $11 million or an impressive 42% versus the prior year quarter. Lower raw material costs, specifically for crude tall oil or CTO optimized price and mix impacts, volumes and higher plant throughput, all contributed to an outstanding financial result to the segment.

The third quarter results again underscore the potential of our Performance Chemicals segment. Lastly, our announced acquisition of Georgia Pacific's pine chemicals business is proceeding in the regulatory review phase with the Federal Trade Commission.

We are optimistic that we will close on the transaction in the fourth quarter and we look forward to welcoming the GP pine chemicals team to Ingevity. Moving to our Performance Materials segment, summarized on Slide 6. This segment once again delivered record financial results.

Segment sales of $85 million were up $6 million or about 8% versus the third quarter of 2016 due largely to increased volumes. Sales of Ingevity's honeycomb scrubbers used by the automotive industry to comply with the U.S.

Environmental Protection Agency Tier 3 and California LEV III standards for gasoline vapor emission control continued to show robust growth. This growth was partially offset by lower sales of pelletized activated carbon due to lower North American light vehicle production as the auto industry continues work down vehicle inventories.

Despite the third quarter's 11% decline in North American vehicle production, our overall Performance Material segment grew revenue in that same period by about 8%. This was based on the strength of continued adoption of these more stringent regulations in North America.

On a year-to-date basis, North American light vehicle production is down approximately 4%, while revenue for our Performance Materials segment is up about 16%, which demonstrates our ability to post strong growth due to regulatory changes despite nominal fluctuations in production.

Segment EBITDA of $34 million were up about $2 million or over 5% versus the prior year. Earnings were driven largely by the volume impacts again specifically due to honeycomb sales. The segment's earnings growth in the third quarter was tampered however by 2 issues.

First, as we execute our growth strategy, we incurred higher expansion costs at our honeycomb scrubber plant in Waynesboro, Georgia. We have added a fourth shift there in anticipation of increased regulatory adoption associated with the 2018 model year production.

Second, we experienced some higher export selling costs for products made at our Zhuhai, China facility. As we await increased demand in China associated with the new China VI regulation, we are utilizing production capacity there on an interim basis to meet demand at other countries in Asia, which comes with higher export costs.

While this has an impact on margins, it does help balance working capital and inventory as we scale up the plant ahead of pending China demand. Margins will improve as the Zhuhai facility transitions to fully supporting China's growing demand. Despite these higher costs, we achieved an EBITDA margin of 40% for the quarter. At this point.

I'm going to turn the call over to John for more detailed review of our financial status and outlook.

John?.

Thank you, Michael. Good morning, everyone. There are 3 areas I'll cover. First, I will provide some additional color on our financial performance in the quarter and over the 9 months of the year-to-date. I'll review our cash generation and capital structure and last I'll review and provide some additional details on our revised guidance.

As Michael mentioned performance in the third quarter and the first 9 months of the year were strong in both reporting segments. As you can see on Slide 7, revenues of $264 million in the third quarter and $743 million for the nine months year-to-date were up about 5% and 7% from their prior year periods respectively.

This reflects strong sales in our Performance Chemicals segment and continued growth in our Performance Materials segment. Adjusted EBITDA of $73 million and a $190 million for the third quarter and 9 months year-to-date were up 22% and 14% respectively when compared to last year. Margins improved in both periods.

Third quarter adjusted EBITDA margins increased 390 basis points compared to the prior year quarter and a 170 basis points when compared to the first 9 months of the prior year. For the 9 months period, our consolidated adjusted EBITDA margin was 25.6%.

Performance Chemical sales were up about 2% over the 9 months year-to-date when compared to last year.

While sales to industrial specialties applications continue to experience volume pressure related to weak rosin demand and constrained TOFA availability, sales to oilfield technologies applications were up 34% and sales to pavement applications were up 6% year-to-date.

Performance Chemicals EBITDA margins were up 290 basis points year-to-date to 17.7% versus 14.8% in 2016.

This margin expansion is attributable to stronger pricing and volumes and higher value-added products, but also importantly reduced costs related to CTO, improved production efficiency and the actions we took last year and reframe our cost structure. Performance Materials sales growth year-to-date is up 16%.

This business continues to perform well driven by regulatory adoption of our automotive carbon products despite reduced light vehicle production in North America this quarter. Performance Materials EBITDA margins were down 260 basis points year-to-date to 40.4% versus 43% in 2016.

As Michael mentioned, costs associated with the expansion at Waynesboro and higher interim export cost for products made at Zhuhai impacted both the quarter and the year-to-date numbers. However, these costs were incurred in order to be prepared to respond quickly when Chinese OEM demand increases as they start to adopt new regulations.

SG&A is in line with our expectations and year-to-date it is about 11% of sales. This number is being impacted by higher compensation costs, but is benefiting from cost reduction and avoidance activities across the company. We remained focused on our margins and managing SG&A spend. It is a priority and will stay disciplined.

For the third quarter of 2017, we recorded net interest expense of $3 million. We reported net income attributable all of $34 million, which is $0.79 a share. Adjusted net income attributable to Ingevity was $37 million and diluted adjusted earnings per share were $0.86. On Slide 8, you'll find some key balance sheet and cash flow information.

As of September 30, our net leverage ratio was 1.39x. Total debt was $455 million, including our capital lease obligation amount of $80 million related to the Wickliffe industrial development bond. We finished the quarter with $71 million of restricted cash for the development bond and an additional cash and cash equivalents of $70 million.

As of September 30, $548 million of our $550 million revolving credit facility is available to us and we are currently borrowing at LIBOR plus 25 basis points. Trade working capital increased this quarter to $180 million, consistent with increased sales in the payables and receivables to go with them, as well as the seasonality of our business.

Also underlying these numbers are intentional inventory builds in Zhuhai and Waynesboro to address the M&A growth demands from both facilities. In China, while we are selling some Zhuhai material into other countries, we are building in-country inventory for the expected adoption of new regulations in China.

These inventory increases in the performance materials segment have largely been offset by strong inventory and capital management in the Performance Chemicals segment. Our CapEx in the third quarter was $14 million and this translates to $36 million year-to-date.

Cash from operations in the quarter was $81 million, which resulted in very strong free cash flow of $67 million. Year-to-date we have generated $97 million of free cash flow. Our GAAP tax rate year-to-date 31.6% and we anticipate finishing the year with a GAAP tax rate of around 31% to 32%.

This improvement is due primarily to increases in profitability from our purification solutions joint venture and income mix between foreign and domestic entities. As a reminder, we own 70% of purification solutions, and this is treated as a pass-through entity for tax purposes.

For clarity, while we consolidate a 100% of the joint venture, only 70% of earnings are included in the calculations of Ingevity's tax provisions. During the 3 and 9 months period ended September 30, we repurchased 30,600 and 43,000 shares of our stock at a weighted average cost per share of $59.29 and $58.88, respectively.

We had 42.1 million basic and 42.5 million diluted shares outstanding as of September 30. Additional information will be available in our 10-Q, which we expect to file later today. Turning to Slide 9 in our outlook.

As we finish 2017, we are tightening our sales guidance for fiscal year 2017 to between $945 million and $955 million and tightening and raising our guidance on adjusted EBITDA to between $227 million and $232 million.

For purposes of this guidance, we are not projecting any sales or adjusted EBITDA from the GP pine chemical business, as we do not yet know on what date that transaction will close. But as noted previously, we are optimistic that we will close the transaction in late 2017 subject to the receipt of regulatory approvals.

During the fourth quarter, we expect continued momentum in our Performance Chemicals segment, recognizing that it is a seasonally lighter quarter in particular for sales to pavement technologies customers.

Additionally, while we have a conservative expectation for vehicle production as OEMs typically take holiday downtime in the fourth quarter, we do anticipate significant growth and margin improvement in the Performance Materials segment when compared to last year's fourth quarter. We continue to review and improve our tax position globally.

We expect to finish the year with an adjusted effective tax rate of approximately 31% to 32%. Our guidance with regards to capital expenditures has not changed. We expect capital expenditures to be between $55 million and $60 million for the year and we expect free cash flow in $105 million to $110 million range.

Excluding the Georgia Pacific's pine chemicals acquisitions, we expect to finish the year with net debt to adjusted EBITDA below our previous guidance and are now expecting the figure to be 1.3x. Pro forma for the closure of that deal, we expect net debt-to-EBITDA to be slightly below 2.4x.

As we look forward, we continue seek revenue and profit growth from applications in our Performance Chemicals segment. We are focused on the execution of the Performance Materials segment, as we meet strong demand in honeycombs and prepared to meet the growing demands of our customers in China. I will now turn the call back to Michael..

Thanks, John. In closing, this was an outstanding quarter for us marked by continued rebound in Performance Chemicals and continued strong growth in Performance Materials. While the fourth quarter is typically slower due to the seasonality of some of our end markets, we are confident that we'll turn in a strong year-end performance.

At the midpoint, our guidance implies year-over-year revenue growth of about 5% and EBITDA growth of 13%. As a result, at the midpoint, our adjusted EBITDA margin would accrete by almost 200 basis points year-over-year. We continue to believe very strongly in the potential for our company.

In closing, I would like to take a moment to acknowledge the hard working commitment of our employees. Our Performance Chemicals team has, for the past several years, persevered through some difficult market conditions. However, the team developed a detailed plan, which included some difficult actions.

They are executing that plan and are rapidly turning the business to attractive performance. Meanwhile, our Performance Materials team continues to tackle the challenges inherent with a rapidly growing business and the work the team is doing today will benefit us well into the future.

I'm extremely proud of our employees' efforts and commitment, and because of them, I am confident in our ability to deliver outstanding performance going forward. We hope you share our enthusiasm for Ingevity. At this point, operator, we'll open up the call to questions..

[Operator Instructions]. We go the line of Ian Zaffino with Oppenheimer..

It seems like the chemical business is really showing to ramp up nicely. Can you guys just remind us of maybe what the targeted margins would be in that business, if we could get back to kind of a normal volume period just given all the costs that you guys have done there and then I'll follow-up..

This is Michael Wilson.

I just want to be clear, you're asking about the Performance Chemicals, right?.

Yes. If I said something different [indiscernible] Chemicals, sorry..

No, I just can't hear you, there was a bit of a break up. But what we have said consistently is that it was our intent to return the Performance Chemicals business to its historical margins of 18% to 20% and that's coming off 13% EBITDA margins in 2016.

So I think as the years progress, we've seen a significant progress toward higher margins and I think our year-end results are going to evidence that when we get to the close of the year.

And again, just as a reminder, I mean, what's driven that has been the cost restructure that we did in 2016, lower CTO costs, which we knew were coming and I've talked about, and of course, we've seen some improvements in market dynamics during the course of the year, particularly in oilfield and then continued growth in our pavement business.

So I think putting aside the acquisition of the Georgia Pacific's pine chemicals business, we remain confident that we would be able to return the margins in our Performance Chemicals segment to that 18% to 20% range between now and 2019.

Clearly, with the acquisition that dynamic changes because the Georgia-Pacific acquisition is coming to us with margins that are closer to 30% on the basis of CTO being supplied under the terms of the supply agreement that we separately negotiated from GP.

So, again, my expectation now is that by 2019 post the synergy capture with GP, this business should have margins well north of 20% on an annual basis..

And then maybe a modeling question for John. I was just looking at your guidance here, I would have thought that they were more flow through down to the free cash flow line given the higher EBITDA and tax rate.

Is there something that's moving around?.

Yes, I mean look it's -- we've got an inventory build going on, right. You don't see it is much in this quarter because the amount of carbon that was being built up was really being offset by the reductions and some of the materials associated chemicals business, right. But you're going to begin to see it more next quarter.

So I think the guidance we've given is where we think we're comfortable to be at. Hopefully, we can do a little better, but that's the guidance we are putting out..

Next we go to the line of Jim Sheehan with SunTrust..

In Performance Materials, could you give us a little more color on the export costs you're seeing in China and also on the Waynesboro incremental class.

Do you see those things recurring in the fourth quarter or were they just one time in the third quarter? And then related to that, you mentioned that margin should be accreting higher in China as you fill out the plant, when do you expect more of an inflection point to occur in that margin accretion?.

So, Jim, this is Michael Wilson. Let me start with the cost question, and I'll turn it over to John. First of all I think if you took the 2 pieces together, the higher Waynesboro cost and the higher cost associated with export at Zhuhai you how you are probably talking about mid-single digit millions of impact to the earnings in the quarter.

So you can calculate if those costs weren't there what the margins would have been. But they are really 2 different things. In Waynesboro, we've added additional capacity to meet the ongoing demand that's associated with the adoption of the Tier 3, LEV III standard in the U.S.

Part of what we've done over the last quarter or so is to add a fourth shift of production there. So to some degree, those costs are structural and they're going to remain in the Waynesboro operation.

That business unlike most chemical plants and most of our chemical plants has a more manual labor component to it, is less capital intensive, but what you should see as the volume goes up from the benefits of having that extra capacity that those fixed costs are going to get absorbed and you are going to see margin accretion there.

The costs in Zhuhai are a little different. I see those as more transitory in nature and that we have the facility there, which is in place ahead of demand. One of the things that we have to prove so that we can meet the ultimate demand that's coming, is that we can run that plant at its nameplate capacity.

We obviously don't need all that capacity today. So we're doing 2 things, we're producing some to build inventory to have a buffer and to fill those supply chain for the demand that's coming, but we're also re-selling some of that product, automotive applications outside of China.

Those sales come at higher cost because of the value-added tax associated with export sales in China. That you're going to go away over time as the Zhuhai plant begins to serve solely China. In terms of the timing of the demand, it's really hard to predict. Again, the national regulation requires a 100% compliance by mid-year of 2020.

We know that the Hebei Province, which surrounds Beijing, has announced a target of beginning of 2019. We also believe they can't wait until 2020 to actually begin building vehicles and be compliant.

So we know that the demand is going to come some what ahead of that, whether it manifest itself in late 2018 or the beginning of 2019 is a bit uncertain, but that's sort of our expectation. The other thing that which has not been announced is what the intentions are of some of the other major provinces in China and whether they will also adopt early.

There is a lot of speculation about that, but we decided really not comment on the speculation, but wait until we've seen definitive announcements and then we'll pass those along.

John is there any color you want to add to that?.

No, I think that's right. I mean, look, I think you'll see, just to close the loop on the last part of your question, Jim.

I mean, I think once you see that China demand chipped in, I think you'll see the margin accretion begin to move as you get that absorption of those fixed costs and I think to that point, you're going to see year-over-year margin accretion in that segment in our fourth quarter results, as well as in the in the chemical segment and we certainly expect to see that accretion in 2018 over 2017..

Now there is recently an announcement in the activated carbon space of an acquisition.

Do you see any possibility of that resulting in more competition for you guys in automotive applications?.

I do not frankly..

And then in terms of Performance Chemicals, crude oil is in the mid-50s now, that's probably higher than you would have thought entering the year certainly.

If it stays at this level in the fourth quarter, does that present any upside to your full-year guidance on EBITDA?.

I think we gave the guidance we gave because it's our guidance. So I wouldn't say there is really an upside for the fourth quarter. I think oil prices staying in the $50 per barrel range; however, it gives us some increased optimism about the chemicals business in 2018.

I think, that for example, just in 1 application area, the drilling segment for our business, I think U.S. drillers have proven that they can be productive and that they can make money with oil in the 50s.

I think with the prices there now, you're beginning to see for 2018 what happen in 2017 that they're putting hedges in place to be able to sell their product at those prices in 2018. So it gives us a bit of increased confidence that in the oilfield segment, we're going to continue to see solid growth as we going to 2018..

Next we'll go to a question from the line of Jon Tanwanteng from CJS Securities..

What's your internal view of U.S.

and global auto production over the next 2 or 3 quarters, and I guess, included your Q4 guidance?.

Yes, maybe Ed Woodcock, you could address that..

Obviously, there is some excess inventory in the North American market. They took a big swing at it in Q3 and really took some sort of that inventory down. A lot of the auto press is still feeling that based on underlying demand, there is maybe 10% to 15% excess inventory in the U.S. market still today.

And that's we've taken a relatively conservative view of what our Q4 will be in relative to production occurring. Outside the U.S. continued growth; Europe, you are seeing great than 50% of vehicles with gasoline vehicles today, low single-digit growth in Europe, but that's a nice mix shift for us.

And then China is having a very strong year with long projections of continued vehicle growth over the next decade..

And then can you comment on the, I guess, the rhetoric around electrification of vehicles, the long-term demand for carbon products in that context, especially with these high-profile announcements by countries that they are going electric or phasing out gas and diesel?.

Yes, Jon. This is Michael Wilson again. I think there are few points to make there, and first I will acknowledge the steady drumbeat of media news regarding electric vehicles. There is no doubt in my mind that electric vehicles are now have traction and are due to stay and we'll see gradual penetration.

But I think that the death of the internal combustion engine is greatly exaggerated at this point.

We look to a lot of primary data sources when the outside folks like IHS, who project vehicle growth and so for example, I think, look at the IHS data, they continue to project over the next 10 years that internal combustion engine vehicles will grow by about 2% per year.

They don't really call for any plateauing of gasoline vehicles until the 2035, 2040 time frame. So that sort of first and foremost, I think also there's this dynamic that we're seeing that Ed referenced to moment ago about a transition away from diesel vehicles because of the environmental issues that have been associated with those.

I think that also benefits other drivetrains including internal combustion engines.

And I think the other thing to keep in mind is that I think when people talk about electric vehicles, they naturally assume everything is 100% electric and the reality is the vast majority of the vehicles that are coming to market or putting on the roads or either hybrids or some sort of plug-in hybrid or true hybrid or regenerative hybrid and you just need to keep in mind that in every one of those cases, those hybrids have an internal combustion engine and because they do they are still going to require an evaporative emission canister and they are going to require scrubber.

The size of the canister and the size of the scrubber are obviously proportional to the size of the fuel system, but they are going to require those. So we don't see it as any significant impact to the outlook of our business over the near to intermediate term.

I think as you get to perhaps the later part of the 2020s into 2030, it would be something that's more of an issue.

I guess the final point that I would add is that the other thing that we see that continues to benefit our business particularly in North America is the consumer preference for trucks versus light duty passenger vehicles that the percentage share of trucks continues to rise. I think it's gone up every quarter this year versus the prior year quarter.

So just a little color on that. There is there's a lot out there about EVs will acknowledge that..

And then just on the CTO pricing improvements that you are seeing, when do you see that stop improving for you? Is it when you lap the WestRock pricing for agreement that you had in mid-2017 and mid '18 or is there more to go in terms of how much better your pricing can get?.

Well, I'm not I can predict exactly when it will stop. We know because of contracts that we have in place that is going to remain a tailwind for us. In other words, we will continue to see lower CTO prices sequentially quarter-to-quarter for at least the next 4 to 5 quarters. After that, I think it comes back to sort of supply and demand economics..

And then just lastly on the GP business, any update on how they're doing, especially in the tight TOFA environment that you're experiencing as well?.

Yes, I going to let Mike Smith comment on that..

Although we don't have very specific knowledge on their business, our expectation is that they have continued to perform at levels that they would have predicted.

The market dynamics as had been indicated remain improving in nature and so we expect that when we do acquire that business that it's going to be in the good solid shape that we anticipated when we announced the acquisition..

And our next question is from the line of Daniel Rizzo with Jefferies..

If we think about pavement technologies and the strong growth you have there, would you say that characterize that as more of a function of the new products increasing penetration or just more activity within the end markets? I mean, is it one just outshining the other?.

I think it's both, right. We did see strong activity in the third quarter that was true not only in North America, but as I mentioned in the prepared remarks in Latin America particularly in Brazil. So activity has been good. I think the spending is mostly at the state level versus the federal level.

But, look, we're growing that business sort of year-over-year at a high single-digit levels. And I think that what's implied in that as the rate of growth is much higher than the rate of growth of infrastructure spending.

So I continue to believe it's a technology adoption story and clearly while we benefited from activity in the third quarter, the new products, many of which I also referenced, they continue to benefit us.

But the reality is our pavement technologies business brings products to construction and road construction that improve the quality of the road, lower the cost of construction those roads, lower environmental emissions and it's those benefits ultimately that are going to drive that business forward..

And then I think you said that post the acquisition that your net debt to EBITDA is going to jump to 2.4x. I was wondering if it is the target you guys kind of shoot for as things progressing to pay that down. Is there a comfort level in the certain range or does it depend? I apologies if you have said this in the past..

We'll just reiterate what we have said in the past, which is we believe that for a company of our size, with our performance characteristics that we'd like our target net debt to EBITDA to be between 2x and 2.5x.

So even with the acquisition closing, we will be within our band and we expect to deliver next year more, but we're going to try and operate the company in that sort of range..

And we have no further questions. You may continue..

No questions? Let me just thank all of you for your time and interest this morning. As I said earlier, we remain very positive about our long-term outlook for the business and we look forward to talking with you again next quarter. Have a great day..

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Those numbers once again are 1-800-475-6701 and 320-365-3844 with the access code of 431407 and it is available after 12:30 PM Eastern Time today through December 2 at midnight. That does conclude your conference for today. Thank you for your participation and for using AT&T Teleconference. You may now disconnect..