Greetings. Welcome to the Ingevity Fourth Quarter and Full Year Webcast and Conference Call. [Operator Instructions]. Please note, this conference is being recorded. I will now turn the conference over to our host, Jack Maurer, Vice President, Communications. Thank you. You may begin..

Thank you, Diego. Good morning, everyone. Welcome to Ingevity's Fourth Quarter 2019 Earnings Conference Call. We appreciate your flexibility in joining us on short notice. My name is Jack Maurer, and I'm standing in this morning for Dan Gallagher, who is traveling this week. If you have any questions after this morning's call, you can reach out to me.

My contact information is included on this morning's news release. 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.

For participants who are logged into our webcast, the slides should be visible in the online viewing pane and also available to download. 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.

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 full year and review the performance of our 2 segments. He will then discuss our automotive gasoline Vapor emissions control business and steps we're taking to maintain our leadership position in this application.

John will discuss our current financial status, then Michael will return to discuss how we performed this year versus our commitments and provide some perspectives and guidance for 2020. We'll then 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. With that, I'll turn the call over to Michael..

Thanks, Jack. Good morning, everyone. Thank you for joining us this morning. We appreciate your interest in Ingevity. Before we dive into the results, just a heads-up that our prepared remarks this morning will be a bit longer than usual as we have a lot of ground we would like to cover.

With that, if you'll turn to Slide 4, you'll note some highlights for the quarter. As expected, we finished the year with strong performance in the fourth quarter.

Despite continued macroeconomic pressure, particularly in industrial applications, we benefited from growth in end-use applications that are driven more by regulation, technology adoption, and infrastructure spending. Overall, revenues in the fourth quarter were $303 million, up approximately 9% when compared to the previous year's quarter.

This includes the benefit of additional revenue and earnings from our acquired Engineered Polymers product line formed through the acquisition of the caprolactone business of Perstorp Holding AB. We delivered significantly improved profitability in the quarter. Adjusted EBITDA were $91 million, up $18 million from the previous year's quarter.

And for the fourth consecutive quarter, we achieved adjusted EBITDA margin of 30% or more, up 370 basis points versus the prior year. Our core SG&A costs were down 6%. And for the quarter, we generated strong cash flow of $50 million. For the full year, sales were up 14%, including the addition of the Engineered Polymers business.

Adjusted EBITDA were $397 million, up 24% above the midpoint of our most recent guidance and within less than 1% of the midpoint of the guidance we gave at the beginning of the year. On a pro forma basis, which assumes we had owned the Engineered Polymer business for the full year in 2018 and 2019, sales were down 0.8% and adjusted EBITDA were up 4%.

Our strong free cash flow enabled us to significantly delever throughout the year. After closing on the Engineered Polymers acquisition, first quarter net debt to adjusted EBITDA was 3.4x. The company ended the year with a leverage ratio of 2.8x. If you'll turn to Slide 5, you'll see the fourth quarter results for Performance Chemicals.

Generally speaking, sales in the Performance Chemicals segment were negatively impacted by weak market conditions, especially in industrial applications and specifically in Europe and Asia. Segment sales in the fourth quarter were $175 million, up 5% versus the prior-year period.

On a pro forma basis, again which assumes we had owned Engineered Polymer business for the full quarter in 2018, sales in the segment were down 13%. Sales into industrial specialties applications, and this include printing inks, adhesives, agricultural chemicals, lubricants and others, were down about 19%.

This decline was led by the ongoing secular decline in demand for printing inks. In addition, on the top line, it also reflects our decision to exit an unprofitable distributor agreement beginning in the fourth quarter of 2019. While having a negative impact on our revenue, the decision has benefited our margins.

What's more, during the quarter, the price of Chinese gum rosin, which typically is the price setter for all rosin-based products in Asia, continued to run along the middle [ph] floor. This resulted in demand weakness for underivatized rosin in export markets. For the year, industrial specialties revenues declined 13%.

Sales of Performance Chemicals products to oilfield customers were down 18% in the quarter versus the prior year due to reduced drilling activity in North America. This was less than the year-over-year decline in U.S. rig count of 26%, owing to our beneficial exposure to oil production and growth opportunities outside the U.S.

For the full year, sales were down only slightly, approximately 3%. Sales to pavement applications were a bright spot, up 16% in what is seasonally a slower quarter driven by excellent growth in North America, which were up 17%. And we also saw increased sales in China and South America, which were offset by declines in other export countries.

For the year, sales in this application were up only modestly. The 10% growth in North America was largely offset by lower export sales. We also continue to see strong adoption and price improvement for our Evotherm warm-mix asphalt technology, which was up 22% in the quarter and 13% for the year.

In the Engineered Polymers product line, sales were 14% below the prior year's pro forma period. The most significant driver was a reduction in monomer cells in Europe due to softer demand and increased competition. Higher-value derivative product sales, caprolactone polyols, and thermoplastics were relatively stronger.

As a result, gross margins remain strong. Excluding the impacts to revenue of the transition services agreement with Perstorp discussed last quarter in which we now have behind us, pro forma annual revenue was down 12%. We continue to believe very strongly in the long-term potential of this business.

As I'll discuss later in the call, we expect it to return to solid growth in 2020. Performance Chemicals EBITDA were $32 million, up 7% for the quarter. On a pro forma basis, segment EBITDA were down 28% in the quarter.

Segment EBITDA, as reported, benefited from reduced plant spending, and improvements in price and mix were partially offset by unfavorable foreign currency exchange. For the full year, on a pro forma basis, revenues were down 11% and segment EBITDA was down 13%.

Generally speaking, our efforts to drive margin accretion in the segment are continuing to bear fruit. We ended the year having achieved segment EBITDA margin of 22.9%, representing a 230 basis point improvement over 2018.

Since 2016, the Performance Chemicals team has delivered an impressive, approximate 1,000 basis point improvement in segment margins. Turning to Performance Materials. As you can see on Slide 6, this segment once again delivered exceptional performance. Sales in the quarter were $128 million, up 14% versus the prior year's quarter.

Sales in China continue to fuel the segment's growth as automakers moved ahead with implementation of the China VI national standard for gasoline vapor emission control. As you know, the China VI regulatory standard calls for evaporative emission canisters essentially equivalent to those for U.S. EPA Tier 2.

In addition, according to the China Association of Automobile Manufacturers, automotive light vehicle production in China was up slightly, about 2.6% in the quarter. As a result, our segment sales in China were up an incredible 270%. In our estimation, China's automakers were at least 90% -- at a 90% compliance rate as we entered 2020.

We are continuing to see strong sales of Ingevity's patented U.S. Tier 3/LEV III gasoline vapor emission solutions, particularly our honeycomb scrubber products in the U.S. and Canada. We estimate that the industry is likely above the mandated compliance rate of 80% for the 2020 model year.

Again, speaking to the regulatory nature of this application, sales increased despite a 10% decrease in North American light vehicle production in the quarter according to Wards. In the quarter, Performance Materials segment EBITDA were $59 million, up $16 million or 37% versus the prior period.

As discussed, we saw impressive volume increases, along with solid price and mix gains in the segment. In addition, we experienced lower plant spending, in part, because we had few scheduled maintenance outages in the quarter. These were partly offset by higher legal expenses associated with protecting our intellectual property.

Still, segment EBITDA margins of 45.8% in the fourth quarter, which is an improvement of 770 basis points versus the prior year period. For the full year, we grew revenues by 22%. Segment EBITDA rose 26%, and margins accreted by 120 basis points. Again, this was despite lower global auto demand and a $10 million headwind from higher legal expenses.

Overall, an outstanding year for the segment. To wrap up the commentary on 2019, I'd like to complement our team of employees in both segments and across the company for their execution. Like many other companies, we are facing a difficult macroeconomic environment. This makes it even more important that we execute on what we can control.

Against this backdrop, our team of employees has delivered margin accretion, lower core SG&A, improved working capital, outstanding cash flow and a stronger balance sheet. To say the least, I'm very proud of our team's execution.

Before I turn the call over to John and before pivoting to our 2020 outlook, given the interest we have received to better understand our intellectual property position in Performance Materials and the surprising magnitude of the share price impact we have witnessed as a result of the most recent decision in our patent infringement actions, I want to take some time here to provide both a refresher and an update on this business.

If you would turn to Slide 7. Our strategy for Performance Materials is straightforward. We want to capitalize and build on our strengths. We are the global experts and technology leaders in evaporative gasoline emission control, period.

We are a valued resource for our customers and their customers and an integral part in the process of designing compliance systems for current and future vehicles. Our applications expertise provide us the credibility to engage with regulators around the world as they seek to modernize their emission standards.

In turn, our proven technology provides automakers the most efficacious and lowest-cost means by which to meet increasingly stringent regulatory standards. We have and continue to invest in production and technical capabilities to meet the growing demand for products that we help create.

We are actively developing new patents and innovating new products today for the technologies of tomorrow's vehicles. And we are continually driving operational excellence with regard to manufacturing efficiency, quality, consistency and cost.

As shown on Slide 8, there are fundamentally 3 levels of technology in use around the world today, all of which employ our unique activated carbons in varying degrees and quantities.

United States first began regulating evaporative emissions in the late 1970s and early 1980s with a Tier 1 canister designed to capture the equivalent of 1 day of parking emissions. In the 1990s, Tier 2 technology designed to capture multi-day parking emissions, running losses and refueling vapors was adopted by the U.S. And more recently, the U.S.

and Canada are moving to a Tier 3 technology, which, for all intents and purposes, is a 0 emission solution. As noted earlier, U.S. adoption of Tier 3 technology is now greater than 80% and will gradually move to 100% compliance for 2022 model year vehicles.

China, the world's largest auto market by country, began adopting Tier 2 systems as part of the China VI regulatory package last year and will achieve 100% compliance during 2020. We estimate that heading into the beginning of the year, approximately 90% of China's vehicle production was China VI compliant.

Europe also moved to a new regulatory standard in 2019, a standard known as Euro 6d. From an evaporative emissions technology point of view, the standard still requires what is essentially a Tier 1 technology.

Compliance was achieved by shifting from granular carbon to pelleted carbon in a canister that was enlarged to capture 2 days rather than 1 of parking emissions. The regulatory changes in these 3 auto markets have been the predominant drivers of our growth in this application over the past few years and will continue to be so through 2021.

Notably, 45% of the world's new gasoline vehicles, over 34 million vehicles are still being regulated to the equivalent of a 1970s U.S. standard. Only the U.S. and Canada, representing less than 25% of the world's new gasoline vehicle sales annually, are on a near-zero emission standard. Moving to Slide 9.

Based upon our engagement with regulatory bodies and auto producers globally, we are confident more countries and regions will move to increasingly stringent standards, providing a long runway for evaporative emissions regulatory-driven road. There are 2 reasons for this.

First, regulatory bodies widely recognize evaporative emissions as a major source of hydrocarbon emissions from vehicles, and the solutions to eliminating those emissions are effective, widely understood and low in cost.

And two, as major auto markets move to more advanced technology, given the relatively low cost of the solution automakers to lower their own costs, would prefer to harmonize their supply chains across geographies.

For example, beginning in 2022, Brazil has passed new regulations requiring Tier 2 standards, of which will, in effect, require a Tier 3 solution due to additional requirements within the standard that was passed.

In China, an additional level of regulation will eventually become necessary to offset the environmental impact of the increasing number of vehicles there. The next step will likely be to implement a Tier 3 near-zero regulation. While the timing of such a move is unknown, it is already being discussed within China.

Similarly, in Europe, regulators are actively discussing the use of an enhanced regulation and will likely require either a Tier 2 system or adding more diurnal controls to the existing system. Again, as these countries move to higher standards, the likelihood of platform harmonization increases which can only bode well for our revenue growth.

As regulations become more stringent, movement toward more advanced systems and larger canisters will continue to increase. As noted on Slide 10, the state-of-the-art solution is the Tier 3 near-zero emissions technology designed to meet U.S. and Canadian standards for which we hold a bleed emissions patent.

We sometimes refer to this as our 844 patent. This is a canister system patent which enables the canister to achieve near-zero emission levels by significantly reducing diffusion emissions from the canister after it has been purged with fresh air.

The typical manifestation of this patent includes our highly engineered pelleted activated carbons in the primary part of the canister and 1 or 2 of our ceramic activated carbon honeycombs on the outlet portion of the canister. This patent specifically applies the U.S. and Canadian near-zero regulations.

It does not apply in other regions in the world that are regulated by older, less stringent emission standards.

In the regions where the patent does not apply, we continue to be the provider of granular and pelleted activated carbon based on the quality and efficacy of our products, our life-of-vehicle performance history and our experience of over 40 years in the application. We are perceived as the safe, low-risk choice.

Our experience in China and with the move to the China VI regulatory standard is a great example of this. The products required to comply with China VI are not covered by our 844 patent, yet our market share in China has moved from a majority share to are now being the preferred supplier on the vast majority of all platforms in China today.

The 844 patent is set to expire in March of 2022. Sometime after that date, we expect to see increased competition for the honeycomb scrubber component of our Tier 3 solution.

Currently, in our Tier 3 evaporative solution as employed today, pelleted carbon plus honeycomb scrubber, roughly 50% of the value content is in the pelleted carbon, and 50% is in the honeycomb scrubber.

While increased competition for the pelleted carbon is possible in the future, the patent expiry is not expected to have a direct impact on competition for the canister's pelleted carbon which fuels the larger primary portion of the system.

We feel that, for the same reasons that we are the preferred supplier today for pellets in the canister, we will be the preferred supplier in the future. Turning to Slide 11. That said, it's still fair to ask how do we intend to defend our market position post the expiration of the 844 patent. The answer is through a multifaceted approach.

Elements of our strategy include capturing value from our unique pelleted carbons through price increases justified by the value proposition; supply agreements, both short term and long term, valued by our customers; new innovation and intellectual property development; enhancing our position as global experts with regulatory bodies; and maintaining our reputational leadership with our customers by being the safe and unfailing supplier that we have been for over 40 years.

Because of our deep customer relationships with auto manufacturers, enabled by our reputation as world experts in evaporative emissions, we have early insight into where future engine design is going and the challenges those designs create for evaporative emissions control.

This enables us, in hockey parlance, to skate not where the puck is but where it is going to go. In terms of future internal combustion engine design, that is toward low-purge systems, and that is where we have focused our product development and patent strategy.

Let me use our newest patent family, specifically our new 649 patent, which was issued in August 2017, as an example of how all these advantages come together to further extend our market leadership. The new patent, as with our current bleed emission patent, is not a composition of matter patent, rather a system-based patent with performance windows.

The performance window addresses canister diffusion emissions for low-purge fuel systems that passed the near-zero emissions test. Low purge refers to engine designs which bring less airflow into the engine. Automakers are interested in doing this to improve engine efficiency and fuel economy.

However, the lower the air volume makes it more challenging for the canister to be effective. Our new 649 patent family is designed to enable canister systems to maintain near-zero emission compliance under low-purge conditions. And reiterating what I said earlier, low-purge fuel systems are the future direction of internal combustion engines.

We've heard from some customers that they consider our new patent to be broad-reaching. Our estimates are that the patent could apply to anywhere from 30% to 70% of future low-purge engine system designs. In 2020, we estimate that 15% to 20% of U.S.

and Canadian vehicles already fall under this patent, and our sales of a honeycomb scrubber designed specifically for this low-purge application over the past three years have grown at a CAGR of more than 30%. I would also note that the 649 patent does not depend on the same art of the 844 patent.

As these engine designs become mainstream, we will be better able to understand the full impact on our business. As world leaders in this technology, we will continue to innovate and develop new products that help our customers solve challenges, just as we have successfully done for the past 40 years.

Continuing with the sports analogies, equally as important to playing good offense is playing good defense. If you turn to Slide 12, we'll review the status of our IP litigation, beginning with the MAHLE case.

So what is it that MAHLE has been doing? They are adding a proprietary material for certain auto platform designs in order to reduce or eliminate the amount of honeycomb scrubber needed. However, it is our contention that their canister designs are infringing our 844 patent.

We believe that the MAHLE's infringing canister designs are in use on a relatively small number of vehicle platforms, perhaps 20 to 25. And it is important to know that MAHLE remains one of our largest customers for both pelleted carbon and honeycomb scrubbers.

In July of 2018, Ingevity filed suit against MAHLE in federal court in Illinois, alleging that MAHLE is infringing on our patent through marketing, manufacturing and the sale of infringing canisters. We also petitioned the U.S.

International Trade Commission, or ITC, to prevent MAHLE from importing activated carbons that are used to infringe Ingevity's patent. MAHLE responded by challenging the validity of the 844 patent through an inter partes review, or IPR, proceeding through the U.S. Patent Office. This challenge was denied by the U.S.

Patent Trademark in a billboard, effectively upholding the [indiscernible] of our patent. Last week, however, an administrative judge for the ITC denied our request to ban MAHLE's infringing importation of activated carbon.

The judge, in reaching his decision, found that for the limited purpose of considering the importation ban, the patent was invalid based on 2 narrow prior art claims. One of these had already been rejected by the Patent Trial and Appeals Board in the case that Ingevity want. On the second, we believe the judge misapplied the law.

Interestingly, the judge found in favor of Ingevity on nearly all other matters at issue, including that MAHLE was infringing, the patent was not unenforceable and Ingevity is not abusing its patent. Perhaps the most important thing to remember is that the ITC's administrative judge's determination does not invalidate our patent.

Simply put, he does not have the authority to do that, and this ruling has no other legal impact on any other legal proceedings. We are planning on appealing the ITC decision. But quite frankly, the ruling, either way, will not impact the patent's legal and commercial viability.

As to our federal infringement case against MAHLE, it will remain stayed until the ITC case is fully resolved. It is unlikely that the case will be heard before 2021 and even more likely that appeals would be exhausted before the patent expiration in March of 2022.

In the interim, and even during an appeals process, the patent will remain valid and in force, and any infringing party will be at risk of increasing monetary damages should the patent fail to be invalidated. Turning to Slide 13. The other action taken was against BASF.

Ingevity's suit against BASF, filed in federal court in Delaware, alleges that BASF is infringing Ingevity patent through premature development and marketing of a product that would presumably compete with Ingevity's honeycomb technology. However, we do not believe BASF solution is currently on any commercial platforms.

As expected, BASF has filed counterclaims seeking to invalidate Ingevity's patent and alleging anticompetitive behavior on the part of Ingevity. We can expect multiple motions back and forth on these matters in the months to come. This trial is scheduled for September of this year.

A final resolution of this case, presuming appeals, is not likely until late 2021 or early 2022, a few months before the patent is due to expire. And as I said before, the patent will remain in effect through any such appeals. BASF had also brought challenges to invalidate Ingevity's patent through an IPR process.

Like MAHLE, BASF lost this challenge and also lost a rehearing challenge. We recognize that many of you are working to try to understand what the revenue growth and earnings trajectory of our Performance Materials segment looks like post the full implementation of the current wave of more stringent regulatory standards in the U.S.

and Canada, the European Union and China and with the coming expiration of the 844 patent in March of 2022. We believe we have given you the information necessary for you to develop your own model.

Specifically, we have conveyed our belief that the outcome of the current patent infringement litigation has no bearing on our forecast between now and the expiration of the 844 patent in March of 2022. We have provided the approximate value content of our products in Tier 1, Tier 2 and Tier 3 systems.

We have told you where those regulatory standards apply by region and country and the corresponding number of gasoline vehicle sales in those markets. And we have told you where we see the potential for new regulations by country and region and what we believe those regulatory standard choices will be over the next 5 years or so.

We have acknowledged that as we head into 2022, we fully expect greater competition for the honeycomb portion of our Tier 3 solution, but we have also explained how we intend to defend our leading market position. And we believe that strategy is sound, and our position is defensible.

Yes, it is possible that we could cede some share in the honeycomb scrubber component of our Tier 3 solution in the 12 to 24 months post patent expiration, and we may see some price erosion as well.

However, it is our belief that these impacts will be more than overcome through improved pricing in other products, the effect of negotiated long-term pricing in our existing supply agreements, lower production costs as we drive operational excellence, the application of our new 649 patent family and substantial new regulatory-driven growth.

As a result, we remain very positive about the outlook for our Performance Materials business, and we see continued revenue and earnings growth, near term and long term. I hope that we have answered most of your questions. If not, we will pick them up in the Q&A.

At this point, I'll turn the call over to John Fortson, our Executive Vice President, CFO and Treasurer, for a more detailed review of our financial status..

Thank you, Michael. Good morning, everyone. I will provide some additional color on our fourth quarter results and review our capital structure. Turning to Slide 14. As Michael has covered the revenue and EBITDA of the company and its segments, I will begin at the SG&A line on the income statement.

SG&A is up from last year by approximately 14%, primarily reflecting the additional costs, both cash and noncash, associated with the Engineered Polymers acquisition, as well as increased legal expenses related to the defense of our Performance Materials intellectual property. This number is up slightly on a percentage of sales basis.

As Michael noted, our litigation expenses were around $15 million for the full year. Our core SG&A for the quarter, excluding litigation expenses of $5 million and amortization of $8.1 million included in SG&A from the acquisitions, was down 6.1%, reflecting our continued focus on cost discipline across the company.

Net interest expense for the quarter was $10.6 million, up 33% as a result of the increased debt associated with the Capa acquisition. Our income taxes on adjusted earnings were $10.4 million for the quarter. Our adjusted tax rate for the quarter was 18.3% and for the year was 21.5%. Our estimated cash tax rate is 12%.

Diluted adjusted earnings per share were $1.10, up 3% from a quarter a year ago. We did not repurchase shares during the quarter as we focused on deleveraging as we committed in our third quarter call. Approximately $389 million remain available for repurchases in our current authorization.

We generated outstanding free cash flow of $50 million, up 5% versus the prior year's quarter. One might expect with an adjusted EBITDA increase of 24%, we should see a greater improvement in free cash flow.

The reason our free cash flow was lower than previously guided is due to the timing of some fourth quarter accounts receivable collections that have since been rectified as well as a pre-buy of capital expenditures. This will simply result in stronger first quarter 2020 cash generation.

Turning to Slide 15, you'll see our capital structure and how that free cash flow has aided our net debt ratio. Our borrowing rate at the end of the quarter for our revolver was LIBOR plus 150 basis points. And the borrowing rates of our term loans are LIBOR plus 100 and LIBOR plus 150 basis points.

Of the term loans, $141 million has been hedged in euros to be fixed at 1.41%. The resultant weighted average interest rate was approximately 3.57%. The rate on our senior notes remain fixed at 4.5%, and the $80 million industrial revenue bond borrowing rate remains at 7.67%. We currently have $619 million available on our revolver.

Net debt as of the end of the year was $1.12 billion. Our net debt to EBITDA was 2.8x. This is below our initial annual guidance of 3x for the end of the year. Trade working capital for the quarter fell from the previous quarter to $264 million, which is 20% of sales, flat compared to last quarter.

Additional information will be available in our Form 10-K, which we expect to file at the end of February. With that, I will now turn the call back over to Michael..

Thanks, John. If you turn to Slide 16, I'd like to take just a minute to summarize how we've delivered versus the commitments we made at the beginning of 2019 and from the time of our Investor Day in 2018. In 2019, we fell just short of our original guidance range for revenues, to be specific by $7 million or 0.5%.

At the start of the year, it's clear we didn't anticipate the severity or the duration of the macroeconomic headwinds the global industrial manufacturers will be fighting against. Despite this backdrop, we still delivered adjusted EBITDA within our guidance and in fact within 1% of the initial midpoint of our guidance.

Given the business environment, we see this as strong execution. We implemented our capital program as planned, and we were on track to deliver our free cash flow target that John noted until the very end of the fourth quarter when some customers stretched our receivables. These receivables have since been collected.

Nonetheless, we were able to drive down our leverage from 3.4x in the first quarter after completing the Engineered Polymers acquisition to 2.8x at the end of the year. Lastly, our segments are ahead of schedule toward meeting the revenue growth and adjusted EBITDA margin goals we set for them at our Investor Day in 2018.

As I said earlier, we're very proud of our team's performance last year, but all of that is now in the rearview mirror. As you know, we aspire to do so much more. Our objective is to continue to be a leading specialty chemicals and materials company with atypical growth trajectory, premium margins, a strong balance sheet and excellent returns.

In our short 4-year tenure as a public company, we've provided strong evidence of our ability to be just that. Clearly, we need to continue to excel in our execution, which now brings us to our outlook and guidance for 2020, which you'll find on Slide 17.

In our plan for 2020, we are assuming little to no improvement in the global macroeconomic environment. However, at the same time, we're assuming limited impacts from the coronavirus in China. As you might expect, this remains a very fluid situation.

As we sit here today, we are only anticipating a 1-week delay in the restart of our China operations post the Chinese Lunar New Year from February 3 to February 10, consistent with China's extension of the holiday. That said, for the Performance Chemicals segment, we expect revenues to be flat to slightly down.

Engineered Polymers should deliver solid middle single-digit growth as monomer markets stabilize and the use of derivatives grows in target applications, spur in part to new product innovation projects we have in the pipeline. What's more, all of the transition-related revenue impacts are behind us.

Pavement technology should see continued solid growth, also mid-single digits, led by North America and the adoption of our Evotherm warm-mix technology and global expansion. Infrastructure budgets seem to be holding in the current environment, which results in a strong list of paving projects.

This growth will likely be offset by continued pressure in industrial specialties and oilfield applications, both of which are likely to be down mid- to high single digits.

We anticipate the Performance Chemicals segment adjusted EBITDA margins will be flat to modestly down for the year, impacted mostly by lower fixed cost absorption of the legacy pine chemicals facilities and modest crude tall oil or CTO inflation.

We expect our Performance Materials segment to deliver double-digit revenue growth and solid accretion in adjusted EBITDA margins. This will be based on continued regulatory-driven growth in China, North America and other regions of the world.

Relatively speaking, growth should be fastest in the first 2 quarters of the year as automakers complete the transition to 100% compliance with China VI and as compliance with U.S. EPA Tier 3/California LEV III standards continue to march to 100%.

Please also note that we have a significant outage to replace a kiln at our Covington facility in the spring. From an earnings cadence perspective, we're not expecting any help from growth in auto production in these 2 regions. And our margin accretion, driven by volume and mix benefits, will be tempered by continuing litigation costs.

It's worth emphasizing, again, that the recent initial determination made by the administrative judge for the ITC denying Ingevity's request to ban MAHLE's importation of patent infringing activated carbon will have no impact on our outlook for the company's Performance Materials segment in 2020.

As a result, we've established our 2020 fiscal year guidance for revenues to be between $1.3 billion to $1.35 billion. At the midpoint, this represents a 2.5% increase over 2019 actuals. We expect adjusted EBITDA to be between $400 million and $420 million. At the midpoint, this represents a 3.3% increase.

The biggest factor moderating our growth is our assumption of a continuing very difficult industrial macro impacting performance chemicals. We believe this business is at the bottom of the cycle. The question is, when does it start to turn? And again, our forecast does not include that for 2020. Our capital expenditures will be modestly lower in 2020.

Major products include the kiln replacement that I mentioned, and we will also be implementing a digital transformation project for businesses that will streamline and improve efficiencies.

As a result of earnings growth, margin accretion, improved working capital performance and the lower capital expenditures, we expect free cash flow to improve significantly to more than $200 million for the year. This will enable us to reduce our debt to below 2.25x, which is right in the sweet spot of the range we always target.

This number does not account for any share repurchases or acquisitions, both of which remain an option. Overall, despite challenging global macroeconomic conditions, we will deliver strong performance in 2020. Any improvement in the global industrial economy would serve as a welcome tailwind.

In closing, I appreciate the work and efforts of our 1,700 employees -- 1,750 employees worldwide. They are a distinct competitive advantage for us. We continue to believe very strongly in the long-term potential for our company, and we hope you share our enthusiasm for Ingevity. At this point, operator, we'll open up the call to questions..

[Operator Instructions]. Our first question comes from Mike Sison with Wells Fargo..

Nice end of the year there. In terms of Capa for 2020, you're looking for better growth.

Can you maybe walk us through some of the improvement and timing of the improvement you expect to see as the year unfolds?.

Sure, Mike. Again, I think in that business, we're expecting a return to growth in the mid-single-digit area, and I'm going to let Mike Smith talk to some of the specifics..

Yes. Thanks, Mike. We have some really exciting new pipeline of innovations coming and some new forecasts from our customers.

We've got -- I'd say one of the largest growth areas will be in bioplastics, so that's the thermoplastic polymers within the Capa product line and also some really positive news from adhesive customers, both in United States as well as Europe.

In respect to timing, I would say that the more positive comparable is likely to start in the second quarter of this year..

Got it. And then as a quick follow-up for Performance Materials. When you think about that business beyond 2020, maybe just a lot of moving parts here, right? You've got a couple issues in the courts. You've got some of these other expirations of regulations, others that come on.

So bottom line, what do you think the growth rate should be for the business post 2020?.

Yes, Mike, we really haven't given that specific guidance beyond 2020.

But as I indicated in the prepared remarks, our outlook, which we do have a longer-term plan shows continued revenue and earnings growth in the years post 2020, really out through the expiration of the patent in 2022, and then recognizing that beyond 2022 we'll likely begin seeing new regulatory-driven growth at a faster pace.

But I think in those intervening years, though we won't have the momentum of these large regulatory adoptions that have been occurring, we will still deliver growth year-to-year..

Our next question comes from Jim Sheehan with SunTrust Robinson Humphrey..

In your discussion of leverage, you talked about getting below 2.25x before potential share buybacks.

Are you considering allocating more cash to share repurchases given the discounted valuation of your stock?.

Yes, Jim, it's not something we've taken a decision on, but it is something that we're strongly considering.

And John can correct me if I'm wrong, but I think we have an existing authorization of $380 million, $390 million?.

$389.5 million..

Yes, outstanding. And I guess, one thing I would also like to add is note, in our corporate tenure over the last four years on a couple of occasions, we've increased leverage outside our target range of 2x to 2.5x in order to pursue value-creating acquisitions. I consider a high-return investment in our own company in the same way..

Terrific. And what is the impact of the Covington kiln replacement on your EBITDA, and which quarter will that occur? I think you said it was in the spring.

And also, was that kiln replaced in -- was another kiln in Covington replaced in 2016 and again in 2018? Just wondering how many kilns you have there, and if they're -- how many will be needing replacement over the next couple of years?.

Yes, Jim. So, your memory's good. We actually have 4 kilns at our Covington facility, and this is the fourth one that has to be replaced. These kilns are getting replaced on a 20- to 30-year cycle, and this outage will actually span Q2 -- or Q1 and Q2. So, a little bit of the impact in both of those quarters.

In terms of the impact of that outage on first half versus second half, it's probably low-single-digit millions at an EBITDA level..

And regarding the patent expiration in March 2022, do you expect your Performance Material EBITDA margins will continue to expand after that patent expiration, and if so what will drive that?.

I expect that they will either continue to accrete or at least to hold.

And I think the reasons for that are many of the things I said in the prepared remarks of taking advantage of the opportunity we have to capture value; better value for our pelleted carbons, which are unique; our efforts as we continue to lower cost through operational excellence initiatives; and just the growing demand and volume for our products.

I think it's a combination of all of those factors that I talked about in defending our market position..

Our next question comes from John McNulty with BMO Capital Markets..

With regard to the Performance Chemicals business, I guess when I'm looking at a revenue outlook that's flat to down slightly, I'm a little bit surprised to see the margins coming down, especially considering you've got Capa and paving kind of -- or the road paving businesses being the ones that should be showing up growth, and yet they're also the highest margin businesses.

So, I guess can you help us to understand kind of the dynamics that are going on there, and when we might be able to see the margins actually start to tick up for that segment as we look forward?.

That's a great question, John. I have the same question. What's really impacting the margins, and again we're saying they're going to be flat to slightly down, is really within the legacy pine chemicals, putting Capa aside.

Because of some of the demand hits, we have lower production, which is leading to the lower fixed cost absorption, and then we also have some slight inflationary pressure on CTO. So, it's mostly a cost-related issue. If I think about pricing across the key components of pine chemicals and I looked at 2019, I think total pricing was up about 4%.

Rosin pricing was down about 4%. And we see both of those at a relatively volume so I'm not expecting a lot of year-over-year pricing decline. I think it's mostly a volume story.

And I think the good news there is, is once we do get that turn in the industrial macro, which, again, we're not calling for, some other people may be, we'll see volumes go up, and then we're going to get a lot of benefits from that, both in cost absorption and back on track in improving margins.

But the increased percentage of mix to Capa and asphalt, to your question, we'll continue to help improve margins as we go forward, not just in 2020, but in the years ahead..

Got it. And then maybe with regard to capital deployment and, I guess, potential for maybe more on the buyback front.

Would you consider an ASR at this point, given how much your stock has come down? Like how should we think about your kind of appetite for buybacks in this kind of an environment at these kind of levels?.

Yes. As I indicated earlier, it's something we're seriously considering..

All options are on the table, John..

Our next question comes from Jon Tanwanteng with CJS Securities..

My first one is do you know how much business you might have lost due to MAHLE's actions? Second, are they still investing in that business, given the litigation? And third, are their products even as good as yours in terms of performance?.

So to answer your first question, it's really impossible to know, Jon. And part of the reason for that is because of the ITC action, as we indicated, the federal court action has been stayed, and that includes discovery. So until we get past the ITC and get back to the federal court action, we're not going to have that information.

Ultimately, I was going to say when, when and if -- if and when we prevail with the suit, all that information will be provided. And we, of course, will be looking to try to recover damages that we've incurred from these platforms that have been commercialized. But at this point, it's really a bit impossible to know exactly what those are.

As I said, though, we think it's on a limited number of platforms, 20 to 25. So you think of the total number of vehicle platforms in the U.S. and Canada, it's a relatively small percentage. Also, as I indicated, MAHLE remains one of our top 5 customers today, a large customer, both for our pelleted products and for the honeycomb products.

In terms of efficacy, we believe our products are superior, and the future technology that we're bringing to the market will be superior as well. Did I miss some--.

Sorry, go on..

Did I miss your middle question or did I cover it?.

Are they still investing in the business, I guess, was the other question but if you -- that's not -- just covered..

Yes, that's a great question. So part of the actions we took legally are to defend our IP, first and foremost. We have an obligation to do that for our customers and for the marketplace. Part of it is ultimately to recover damages that we've been incurred because of infringing products.

But the rest of it is really to put everyone on notice from competitors, the OEMS, the Tier 1s, the testing houses that this patent is out there, that's in force, and it remains valid today. And I do think that both actions, both MAHLE and BASF, have had the intended effect of slowing down the infringing activity.

Has it stopped it completely? We won't know that again till we get into the trial phase of both of these..

Fair enough. And then just one question on the outlook. I just wanted to clarify.

You only have a single week of the direct coronavirus impact reflected in your guidance or have you contemplated a broader impacts of both the Chinese economy in order demand, on the chemicals and materials side in there?.

The week has to do with our own plant operation. We were scheduled after the Lunar New Year started on the 27th to restart, actually yesterday on the third. But the Chinese government, as you know, extended the Lunar holiday. And so we're now scheduled to come back up on the 10th.

We're monitoring that every day in terms of the availability of our employees, having them back to Zhuhai and Changshu, respectively, our expats coming back, et cetera. And as of today, we are on plan and scheduled to restart on the 10th. That obviously can change. And I think a couple of weeks here can, one way or another, can make a difference.

Unfortunately, we needed to pull this call forward in order to address some of the issues we addressed today. So I don't have the benefit of another couple of weeks to see how this thing plays out. So at this point, we're going with the forecast, the plan that we put together in late December with our Board that was prior really to the coronavirus.

And so I would say, for all intents and purposes, not baked in. But again, we also haven't baked in anything from the improving industrial outlook in the second half of the year..

Okay, got it.

And just to be super clear, so it's 1 week of downtime, no change to what you forecasted your -- in demand for China for the year?.

That's correct..

Our next question comes from Chris Kapsch with Loop Capital Markets..

So in your formal comments, you had mentioned the fact that the gum rosin industry is oversupplied, has been oversupplied and is adversely affecting pricing on TOR. And then towards the end of your formal comments, you mentioned that you thought that the pine chemicals business or industry, more generally, is adequate to the bottom of the cycle.

So what I'm curious about is how much of this -- there's a dynamic where the curtailment of gum turpentine production or the pursuit of gum turpentine production could cause the gum rosin industry to produce less rosin and create an inflection in the dynamics around that business.

I'm just wondering if, based on prior cycles, how long that typically takes place, and if you see that playing out? And if you have any visibility along those lines at this juncture?.

Yes, that's a great question, Chris. The gum turpentine pricing sort of corrected itself over the second and third quarters of last year. And we saw gum rosin pricing really reach a bottom, I would say, mid- to late third quarter. And the pricing has just been bumping along the bottom.

And I think the harvest season ended in the third quarter, but the situation of elevated price of the turpentine persisted for quite some time. So I think there was a significant amount of gum rosin inventory that was built up.

And -- what I think you see happening now is just the pricing sort of bumping along the bottom until that inventory is consumed, and we then begin to see that upward inflection point. My guess right now is we don't really see that until the beginning of the second quarter.

And then I think we just have to see how it trends from there, but that's something that we track week to week..

And so your guidance assumes -- for the full year assumes, at this point, no recovery in that? No inflection in that dynamic?.

That's correct..

Okay. And then just one quick follow-up on the litigation front.

Given that as you put, the -- there's greater awareness throughout the supply chain because of these actions that you've taken against MAHLE and BASF, is there any instances where the OEs could be on the hook for damages for potentially -- potential infringement? And how are you managing those conversations with, ultimately, those customers who are specking in via maybe a Tier 1 or Tier 2 supplier?.

Yes. OEMS, likely, in some cases, likely are infringing, both directly and perhaps indirectly. And we have had communications with those OEMS, making sure that they are aware of the patent situation and the potential for damages.

I think in some cases, I don't know this for a fact, but I think in some cases, their Tier 1 suppliers that are infringing may be indemnifying them. A lot to find out as all this progresses..

Our next question comes from Ian Zaffino with Oppenheimer & Company..

This is Mark on for Ian. Just a quick one. In terms of the -- I guess your petition process with the U.S.

ITC, what's the estimated time line of the petition? And when do you guys expect to see a response or resolution? And sort of does this, I guess, coincide with the federal infringement suit you guys mentioned for early 2021?.

Yes, in terms of the ITC action, we need to file our request for a review of the administrative judge's decision by February 10. If the ITC commission decides to go forward with a review, they need to complete all of that by May 28 of this year.

In terms of the schedule of other items, the infringement case against BASF is scheduled to go to court in September of this year. And the court date for MAHLE has been stayed pending the outcome of all the work with the ITC.

So it's not likely that court date even gets set before the second quarter of this year, and it will likely be sometime in 2021 at the earliest..

Our next question comes from Paretosh Misra with Berenberg..

In your Performance Chemicals business, how much headwind are you factoring in from the raw material inflation?.

It's not something that I want to really quantify for competitive reasons. But yes, it's probably high single-digit millions to a little higher..

Got it. Fair enough. And then just a clarification on the comments on your Capa Engineered Polymers business, I think you said mid-single-digit growth.

Is that on a pro forma basis or as reported basis?.

That'd be on a pro forma basis year-over-year..

Okay.

And lastly, on your free cash flow, is the cash tax rate pretty much the same as the book? Or is it much different?.

It's different. It will be a little bit lower. So I would think of it as being in the sort of 17%, 18% range, Paretosh..

Our next question comes from Daniel Rizzo with Jefferies..

You mentioned opportunities, I think, in oilfield offshore.

I was just wondering where that's coming from?.

It's largely in the Middle East. So we're offshore drilling outside the U.S..

I mean, is it growing as a significant clip? Or is it just --.

Mike, do you want to comment on that, the new business that we've gained?.

Yes, I'd say that it is nowhere near the level and size that we have in North America. But as a percentage of the business, it can have a nice improvement. It could be 5% at some point during next year of our total oilfield business in terms of growth over 2019..

Okay..

You'd hope that as a potential partial offset of what we expect to be lower North American drilling in 2020 based on the forecast we're getting from our current customers..

Okay. And then you mentioned as one of the ways you're kind of defending your position in Performance Materials is just with the length of supply agreements.

I was just wondering if you can provide color on how long it lasts? And then just any details on how it helps just ward off competitors?.

Yes, I'm going to be been very careful what I say here because, again, for competitive reasons, really don't want to get into the nature of those. But we have supply agreements that are both short term and long term in nature across various products..

Our next question comes from Vincent Anderson with Stifel..

Yes.

So just quickly, what exactly is driving the CTO inflation, especially if you're going to be buying less outside of your long-term supply agreements on these lower utilization rates?.

That's really just supply and demand for CTO. To some degree, supply of CTO was reduced during the course of 2019 as paper manufacturers for packaging board, containerboard had reduced need. They produced less pulp, produced less CTO, and that created some tightening of the supply and demand for CTO..

Okay.

And then as we look at Evotherm and Capa and its derivatives growing in share and performance, is there some additional SG&A that will have to come along with that? Or should we start counting on a pretty good amount of SG&A leverage ahead of us here?.

Not significant additional SG&A. I think we expect margins in both of those areas to grow over time..

Great. If I could sneak in one more.

I was just curious if you were willing to break out sort of how much of your TOFA value chain is going into export markets or other places where it may benefit from this pretty significant increase in feedstock costs for other fatty acids?.

Mike, do you want to comment to that?.

Well, let's -- the amount of TOFA for export is really quite modest. Out of our TOFA portfolio, it's probably in the neighborhood of 10% that gets exported and....

And on the rosin side?.

And on the rosin side of the business, it's around 20% of our rosin that gets exported..

Okay.

And just a clarification on rosin, does that include ester derivatives? Or is that just rosin?.

That's the entire rosin portfolio, both derivatized and straight merchant rosin..

[Operator Instructions]. Our next question comes from Roger Spitz with Bank of America. .

Last quarter, you said that the Chinese gum rosin prices were below 2,400. Can you give any more specificity about -- it sounds like you said earlier this call that they really troughed around in Q3.

What price level did they trough at? Where are they now? Where are they at the beginning of 2019, just to give us some sense?.

Sure. First of all, I think there's a misquotation in that the $2,400 per ton number probably related to gum turpentine, which had fallen from somewhere in the mid-$5,500 a ton to $2,300, $2,400 a ton.

Gum rosin prices sort of bottomed around $1,300 to $1,350 a ton, Mike? And then you can give a little color as to where they are today and where they were a year ago?.

Sure. So they're in that $1,300 per ton neighborhood, and they've actually been there for approximately 6 months. That level and the current level is approximately 25% below the 2018 average for Chinese gum rosin..

And I'll give you an idea, I think first quarter last year was something like $1,550 or $1,500....

Yes, yes. Because it was $1,800 on average. And then it was gradually going down, and it stayed stable at around $1,300 since July..

I think a more reasonable longer-term benchmark for gum rosin has been $1,700 to $1,800 a ton..

And that's consistent with the 2018 average..

And my other question is, can you give us any insight on caprolactone monomer volumes.

For the full year, what were the volumes for just the monomer down by, if you can tell us that?.

I don't know if you had that level of detail, Mike….

Yes, the monomer volumes were down approximately 30% pro forma basis in the Capa business..

And I think we said overall on a pro forma basis if you back out the impacts of the revenue, impacts from the Perstorp transition that on a pro forma basis overall, capital was down 12%. So that means that the derivative products were down very little..

And again, I understand you said demand was down on the monomer, but is there any color you can give on the drivers of that -- of the monomer demand decline?.

Well, yes, two impacts. First, we had a Japanese competitor who have their plan out for fire. And they entered the market earlier in 2019 and regained their share position. And so that happened, and we see that happens really in the second quarter of last year.

And that level has remained fairly stable throughout the course of 2019 and as we start this year. And then the second point would be, I'd say, just the general overall industrial challenges. A lot of that monomer goes to Europe. The industrial economy, as you know, in Europe has been very weak.

So between the competitor regaining share and weak industrial markets, that's the driver for the monomer decline..

Our next question comes from Garo Norian with Palisade Capital Management..

I know you talked a little bit about the innovations in Capa and talked about one of the areas being bioplastics. From a big picture, the plastics world seems to really be focused on improving the biodegradability and recyclability of plastics with some guys putting some big targets out for 2025 and such.

And I was just curious, from that perspective and your capacity that you have in Capa today and looking out over the next few years, is there a likelihood that you'll actually have to expand capacity in order to potentially meet that type of demand?.

I think for caprolactones into bioplastics, it is from a relatively small base, but it's growing rapidly, more than 20% per year. And just so that people understand, one of the alternatives to traditional plastics are polylactide chemistries.

But the reason people don't like polylactides is they don't have many of the characteristics of traditional polymers with respect to rigidity and thermal stability and those kinds of things. And so how Capa is used is in the polylactide chemistry to impart those characteristics that give the product more of the fill that the consumer is used to.

So it is a very exciting area for development. I think as we stand right now, we are debottlenecking the Capa facility, along with the glassware replacement project we talked about. So we're going to get additional capacity from that.

And in terms of future derivative capacity, again as we mentioned previously, we're doing a lot of work to see if we can actually use some of our existing capability and capacity on the pine chemical side to produce the downstream polyols. And that's looking more and more encouraging.

So we'll continue to monitoring the capacity side of it, but I don't see any really large CapEx outlays for that at this point..

Our next question comes from Vincent Anderson with Stifel..

I was just wondering, is there anything that you can do proactively right now to drive your utilization rate back up in pine chemicals, whether it's more ester derivatization on the TOR side or something along the fatty acid side?.

Yes. I guess a couple things. First of all, you may remember that from an operating philosophy standpoint, we run to rosin demand because when you look at the product value chain, there's more value there than on the TOFA side. It's pretty easy to move TOFA into the marketplace as a substitute for other fatty acids that we wanted to.

But again, when you fractionate the CTO, you get rosin and TOFA in relatively fixed proportions. So the one thing that we don't want to do is to overproduce rosin, oversupply and impact the pricing dynamics. So the one thing that we are intent on doing is making sure that supply matches demand. I think, ultimately, that makes for a healthier industry..

So you're not capacity constrained on a derivative where there would be an option to push more product on the TOR side?.

No. Absolutely not. No..

Okay, that's great. And then just one other one. I don't know how big of a business it is for you, but I would imagine agriculture has what are hopefully some easy comps to last year in North America.

We've heard there's some destocking still left to do in certain products, but I would imagine you're expecting some year-over-year recovery included in your ag products?.

Yes, I would say like with Performance Materials and like Pavement and some of our other markets, our growth is really being driven more by the adoption of our technology that we're providing a dispersant that is considered superior. So it's being substituted for existing chemistries.

But, Mike, I don't know if you want to comment on that situation overall?.

I'd say your characterization is accurate. We have had very strong growth, high single-digit growth in our ag dispersion business, and we expect that to continue long term. And we actually see good globalization of that technology.

But as you also mentioned, the ag business in 2019 was challenged, and there are -- there likely is some destocking to be done in the beginning of the year..

Great.

Any chance we could get a rough share of Performance Chemicals? Or is that too much detail?.

I don't know about it from a share standpoint, but the size of this application for us is $25 million, $20 million?.

About $25 million for the ag part. We also have dispersions for dies..

Our next question comes from Ryan Bloom with The Hartford..

I just want to understand better the transition to the 649 family of patents.

Is it necessarily required under regulatory standards for that technology to use the pellets going forward? Or can there be some relative delay if the economics of the legacy patents are cheap enough to delay that uptake?.

No. What's going to drive that patent into coverage is the change in engine technology that move to these low purge systems. And that's really being driven by automakers in order to control evaporative emissions under that low purge technology, we'll probably be operating at least, we think, 30% to 70% of designs under the teachings of our patent.

Ed, could you comment a little more on that?.

Again, it's based on the long-term shift from a higher purge engine to low purge engines. And as those low purge engines become more mainstream, it goes -- it falls into the solving the purging and the emission structure of that canister system. Our 649 patent really enables them to meet 0 emissions with a much more challenged engine environment..

Ladies and gentlemen, there are no further questions at this time. I'll turn it back to Michael Wilson for closing remarks..

Well, thank you, everyone, for your time and interest. I hope that we were successful in clearing up a lot of things there might have been confusion about. It goes without saying, we remain very positive about this business, and we look forward to talking to you soon. Take care, and have a great day..

Thank you. This concludes today's call. All parties may disconnect. Have a great day..